1. Why the falling pound brings gloom.
- Subjects
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POUND sterling , *NATIONAL currencies , *EURO , *MONETARY policy , *ECONOMIC policy , *FISCAL policy , *ECONOMIC expansion ,ECONOMIC conditions in Great Britain, 1997- - Abstract
Something extraordinary happened in the run-up to Labour's landslide victory six years ago: the City's currency dealers drove the pound higher rather than lower. Slung out of the ERM in 1992, sterling had sand kicked in its face until mid-1996. Then it started to do the kicking. By January 1999, when the euro was launched, the pound's trade-weighted value (the broadest measure of its worth) had risen by 20%. There were three main reasons why the pound started to punch its weight. First, Great Britain restored credibility to its monetary policy so that currency dealers ceased to worry about a return to the bad old ways of high inflation eroding the value of the pound. Second, the economy, and especially the City of London, did well in the 1990s, and this encouraged investment inflows of foreign money. Third, currencies overshoot: dealers marked the pound down too far in the mid-1990s and marked it up too much at the end of the decade. The strong pound turned a healthy expansion into a feel-good economy. At the same time, the strong euro will hit growth in Europe while the weak pound will reinforce Britain's recovery--hardly a promising backdrop for an early referendum on joining the euro.
- Published
- 2003