Friday’s sterling ‘flash crash’ marks an end to the Brexit phoney war
Nervous investors decide to dump British currency in advance of a hard Brexit. The euro climbed to 92p at one point and parity could be just months away, says Dan White
THERESA May’s announcement to last week’s Conservative Party conference that Britain would be triggering Article 50 by the end of March 2017 with the UK leaving the EU by spring 2019, means that Brexit, most likely so-called “hard Brexit”, is now upon us.
While May’s announcement played well to the adoring delegates, the markets hated it. Sterling, which had already down 15pc against the euro over the previous 12 months, weakened further early last week.
However, this was merely hors d’oeuvre for what happened on Friday, when at one point sterling was down 10pc against the euro. While the British currency later staged a partial recovery it settled at about €1.11 or about 90p.
What we are now witnessing is beginning to look very like an old-fashioned sterling crisis as nervous investors dump the British currency in advance of Brexit. Employers’ body Ibec predicted last March that sterling could fall to parity with the euro within two years of a Brexit vote.
Following last week’s turbulence on the foreign exchange markets it would seem that Ibec was being overly optimistic — parity could be just months away.
The collapse in the value of sterling is already feeding through into exports with the value of Irish goods exports to the UK falling by almost 5pc in the first seven months of 2016. And that’s almost certainly only the beginning. A near 20pc fall in the value of sterling will hurt even those indigenous exporters who have hedged forward as those hedges expire over the next 12 to 18 months.
Also in the firing line is the tourist industry. A British visitor to this country who was getting over €1.40 for her pound as recently as last November is now getting just over €1.10. While visitor numbers were up 12pc in the three months from June to August, don’t bet on this continuing.
When the exchange rate begins to kick in it won’t be just British visitors, 41pc of the total, who will be affected. For those travellers from mainland Europe or North America who like to holiday in cold, wet, windy countries, Scotland is now 25pc cheaper than it was a year ago.
This is going to feed through into the domestic economy very quickly. Last week the Central Bank forecast that while underlying domestic demand (the best proxy for the performance of the Irish economy in the leprechaun economics era) would grow by 4pc this year it would grow by just 2.7pc in 2017.
Any slowdown in the domestic economy will hit tax revenues and threatens to upend the fiscal calculations the political parties relied upon to fund the promises they made during last February’s general election campaign. The so-called “fiscal space” has disappeared, something Michael Noonan would do well to bear in mind when he delivers Budget 2017 on Tuesday.
Now that Brexit has moved from the realm of the hypothetical to the real, two other serious threats to this country have emerged.
If the June 23 referendum result was about anything it was about immigration into the UK. A post-Brexit UK will almost certainly insist on imposing controls on the entry of EU nationals, including those from Ireland, into the UK.
What will the reaction in this country to the end of the common travel area that has existed since 1922 be? How will Irish people feel about giving up the automatic right to live and work in the UK, something which millions of us have done since independence, in order to retain a right to work in Brussels or Frankfurt that very few of us have exercised?
Meanwhile, the full implications of the European Commission’s ruling against Ireland in the Apple tax case are only now beginning to sink in. If it is upheld by the European court the ruling will gut the 12.5pc company tax rate upon which we have relied to attract foreign direct investment to this country.
Although most of the coverage of a “hard Brexit”, where the UK leaves the single market, has focussed on the possible economic damage to that country, there is an upside. A post-Hard Brexit UK, excluded from the single market, would opt for a low-tax, low-cost, deregulated economic model. It could also let sterling fall to levels that would make British exports hyper-competitive — regardless of whatever tariffs the EU imposed.
These threats represent a clear and present danger to this country. The Government’s response, to set up an “all-Ireland civic forum” on Brexit. Stand by for a very tough economic year in 2017 as Brexit begins to bite.