Brexit transition demands just the start
Since mid-December I have written a few pieces concerning what I consider to be the irrational optimism surrounding the prospect of a Brexit that is beneficial to the UK. The transition period is just that and should not be considered any more than a stepping stone to the long-term prospects that businesses will face when the UK finally departs the EU.
The proposals set out by David Davis and Michel Barnier yesterday set out exactly what we can expect when the transition is agreed, and talks move on to stage two.
Perhaps now all the optimists will rain in their expectations and accept the reality that the EU is not going to hand the UK and easy path to “freedom” that will make a statement that shows they expect 100% from any member of the region.
Even the most die-hard Brexiteer must accept that in the short term the economy will suffer if not for the simple reason that UK businesses will face tougher competition from EU competitors as the European “playing field” suddenly gets anything but level. It is a matter for conjecture as to how long, if ever, it will take for the UK to become a “global player” opening new markets for its goods and services but until it has at least embarked on that path the productivity, competitiveness and the currency are going to suffer.
Devalue by hook or by crook
As we have seen over the past week, strong currencies are becoming highly unfashionable. Donald Trump wants a strong dollar from a purely macho perspective but sees the benefits (despite what he says) of a weaker currency. His Treasury Secretary wants a weaker currency and came very close to saying that in Davos although his words were apparently misconstrued.
The ECB President Mario Draghi was expected to announce the tapering of the Asset Purchase Scheme last week but realized that de-facto tightening of monetary policy was not going to ease the pressure for a stronger common currency.
It is likely that the UK is going to need to see the pound fall by a substantial amount to ensure competitiveness. This will of course fuel inflation and that will give Mark Carney or his replacement serious issues. Interest rate will need to rise to stop inflation getting out of control and a scenario that resembles September 1992 could present itself. Inflation out of control and a currency that is overvalued. Thankfully, the pound won’t be shackled to the strongest currency in the world as it was then.