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UK’s Europe threat

15 May 2012 By Ian Campbell

British holiday-makers will welcome it. The pound is rising as the euro weakens. Sterling will rise further in the coming months if Greece exits the euro zone and exacerbates the single currency’s crisis. But the pound’s rise promises UK pain-and serious problems for policymakers.

The 4 percent rally against the euro so far this year isn’t dramatic enough to be called a problem or claimed as an excuse. The pound remains quite low. A euro now worth 80 pence is well down on its 97 pence peak but still up on the sub-70 pence that was the norm before 2008. But it won’t stay that way if the next phase of the European crisis is a euro exit – or two.

If Greece departs the zone, the resultant panic will be great. The pound would become still more of a safe haven. That 70 pence level for the euro, implying a pound appreciation of over 12 percent, could quickly be a reality. UK competitiveness in Europe would be harmed but the damage would go deeper than that.

An existential euro crisis would harm already weak European growth as investment plunges, consumers cower, banks struggle and financial markets tumble. All this euro-carnage would undoubtedly be felt across the Channel.

A half of UK exports go to the broader EU. The UK’s policymakers have been counting on rebalancing, with consumers overseas helping to pull a more competitive UK forward. Outside the EU that strategy is working. Export volumes to non-EU countries are up an annual 5.3 percent in the past three months – and by 21 percent since 2008. But in Europe a toll is already being taken by recession in weaker economies. Exports to EU countries in the three months to March are down by 3.3 percent in the past year and by 5.5 percent since 2008.

For UK policymakers the worries are huge. A euro zone in outright crisis will imply a much stronger pound, disappointing exports and a UK that faces great difficulty getting out of the recession in which, unlike Europe, it is currently mired.

 

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