Sunday, July 26, 2009

UK was clever to let the pound devalue early in the cycle; Europe will be less lucky

Iceland's krona proves the magic wand as Europe ails (Ambrose Evans-Pritchard)

Iceland is over the worst. The country has defied the global shipping crash to eke out an 11pc rise in exports over the last year. Iceland will be back in surplus by next year, from a peak deficit of 25pc of GDP. Icelanders have taken a hit, of course. Unions have accepted 'real' wage cuts of 10pc. Health care and welfare is being cut 5pc, education 7pc, and the rest 10pc. However the jobless rate has risen to just 9.1pc. This is below the eurozone average of 9.5pc, and is stabilising much earlier. Nothing is cheap, but prices have come within reach. Reykjavik's cafés are packed with euro-youth, at last able to afford a taste of all-night dancing at this Arctic Ibiza. Out in Iceland's Eastern fjords, Alcoa has raised aluminium production to record levels.

Posted by drewster @ 10:17 PM (2730 views)
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12 thoughts on “UK was clever to let the pound devalue early in the cycle; Europe will be less lucky

  • britishblue says:

    Couldn’t agree more. We are very lucky to have been able to devalue our currency and also lucky as a nation that most of our domestic borrowing was in sterling rather than Swiss Franc (like most of Eastern Europe). However, the simpletons amongst us will decry the demise of the pound based on the fact that their summer holidays are more expensive.

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  • paranoia blue says:

    BB
    Are you some sort of nut?
    The “real” value of any currency will always be:
    a) Its “true global buying power”
    b) Its correlation to Au!
    – and nothing else………………..

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  • paranoia blue says:

    Re: Iceland
    a) Stock-market value: move the decimal point – at least – one place to the left!
    b) Similarly, its currency can now buy only 10% of bullion, previously!
    …..get real mate, or keep smoking, whatever you are smoking!!!

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  • @ britishblue,

    The article mentions that Icelanders have borrowed a lot of money in foreign currencies; but glosses over it as if it’s just a temporary problem. Presumably it’s a problem for the Euro/Swiss banks which made all those loans, against assets (Icelandic property & businesses) which are now worth significantly less.

    @ paranoia blue,

    A “good” outcome depends on what your definition is. If the UK had kept the pound high against the Euro then we’d have worse unemployment. For society at large, having 33.6% of youths unemployed (as in Spain) is a bad thing – the devil makes work for idle hands and crime rates skyrocket. Furthermore, keeping people in work helps keep up debt repayments, which keeps the banks solvent. What’s a politician to do? Sacrifice jobs and banks just for the sake of a strong currency? Or take the easy way out with competitive devaluations?

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  • novice pete says:

    BB
    re the simpletons amongst us
    Would that include the economists and financial ‘experts’ that paved the way to where we stand now?

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  • Good grief. AES in the Torygraph now comparing us to Iceland in a “What if….” article.
    He has truly lost the plot.
    If the UK economy had the figures of Iceland that he quotes (wages cuts of 10%, etc) plus the massive devaluation, we’d have riots on the streets.
    Must have been a rush job on a Sunday night, for AES to have thrown this article together. Not up to even his low standard…………

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  • britishblue says:

    Paronoia Blue @2 and 3
    No I am not some kind of nut. It is far better for the UK society as a whole that the pound was floating and we were able to de-value. The pound was way, way to high for years against the rest of Europe and it wasnt natural that their hotels, restaurants, housing food, etc was far cheaper than they were in the UK. Sterling was a bubble and the bubble has been defalted. A much more natural level for sterling longer term will be between 1.1 and 1.2 to the Euro. This will enable us to be more competitive, export more when the current downturn levels out and provide more employment for the youth. We also become less of a desirable place for migrant workers. Europe is one of our major trading partners and the balance in the exchange rate is being rectified. The UK mortgage book is not full of swiss france mortgages like in Poland and Hungary, so individual householders haven’t gained greater debt. Their sterling debt is the same as it was when they took their mortgages out. Maybe you should take a read up of what happened to the UK economy 2 years after they left the ERM to see the pros and cons of keeping a currency unaturally high.

    Decrying the fact that the Pound has devalued is like decrying the fact that house prices have gone down. Its just a different set of vested interests and bubbles. Both needed to be devalued to get us back on track.

    Novice Pete @ 5. Many of the financial experts that you refer to weren’t paving the way, they were padding out their pockets and it lookks like many of them have got away with it. I think you will also find that there were many people ranging from individuals on this site to more eminent economists that gave warning signals of the current downtunr but the greater herd ignored them.

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  • Low value of the pound causes unemployment because the companies pay more for their supplies and need to cut somewhere else which is jobs. Manufacturing in the UK did not go up as result did it?

    International suppliers did not put prices up yet hopping in a sterling recovery but they will probably do soon which will translate in inflation up to 30%

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  • @7 Mander… High import led inflation as you describe is not a given. It rather depends on overall supply and demand. As we know all major economies are running at much less than full output so there is effectively more supply than demand. I very much doubt 30% inflation is on the cards.

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  • Evans-Pritchard is a shill. His (transparent) job is to talk up the Dollar and US/UK economies and talk down the euro and eurozone economies, foremost Germany’s. I’m amazed anyone still takes him seriously. This was the guy who promoted investing in property in Florida in early 2008 off of a rebounding US economy and has steadfastly taken the banksters’ side of perpetual bailout and money-printing, all for the ultimate common good of course.

    As to the devalued pound being a good thing, consider this: according to ONS figures the price level of imported goods into UK is more than a fifth higher than it was four years ago(21.3% above 2005 level in May 2009). In Germany the price level of imported goods is now basically the same as it was in 2005(+0.8% June 2009 compared to 2005).

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  • paranoia blue says:

    BB
    Oh well, it the “pound in your pocket” mantra, yet again. ATB

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  • Skeptical First Time Buyer says:

    I’m with British Blue, the pound like the housing market was overvalued.

    In the long run it will do us no good to continue with our trade deficit. In my view this whole thing is a necessary re-adjustment and it’s just a shame the successive governments have (perhaps unknowingly), spent so long trying to prevent it.

    In this country we had a housing bubble, a currency bubble, and an unbalanced economy over reliant on financial services. We need to re-balance, cut the trade deficits, and help our exports. What we’ve been doing was un-sustainable and the longer we carry on doing it, the harder it is to put it right. The credit crunch is the medicine we need to swallow. What remains to be seen is whether it will cure us.

    I actually have greater concerns about this thing not hitting us hard enough for the messages to sink in than, than I do about the now massive task we currently of re-balancing the economy, (even with the current debt, the state of the education system, and the chronic under investment in technologies and industry over the past 20 years).

    Oh well, I’m still pretty young, plenty of time to emigrate.

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