Pound Weakness and Brexit: “Britain is seriously behind”

Pound weakness and Brexit
‘Britain is seriously lagging behind’

9/30/2022, 5:03 PM

The currency collapsed immediately after the new British Chancellor of the Exchequer presented his plan. In the “Zero Hour” podcast, Holger Schmiding, chief economist at Berenberg Bank, talks about the government in fiscal trouble and the prospects for Germany after the recession.

Zero Hour: After British finance minister Kwasi Kwarteng presented his plan for tax cuts and energy aid, there was a huge backlash. The pound fell against other major currencies. Are markets overhyped?

Holger Schmiding: Basically, markets are perfect. Britons are now heading for a much bigger budget deficit than expected. About three weeks ago, Prime Minister Liz Truss announced more support for families and businesses than she had previously announced. Now, on top of that surprise, she also wants to cut taxes. Hence significantly higher government spending and lower taxes. It was probably too much for the markets.

The UK government is arguing about avoiding recession, which is where it wants to go.

Measures to curb rising energy prices, especially for households and businesses, will slow the recession. They reduce inflationary pressures. It really helps. On the other hand, tax cuts only have a long-term effect. Companies will take longer to respond with more investments. Especially since Britain is already mired in recession, as is Germany.

Now the British government has maneuvered itself into a corner with this programme. A weak pound can be a problem for the economy.

A weak pound is not a big problem. Of course, this makes imports a little more expensive, but the economy can export a little cheaper. But there is certainly risk if the whole thing continues and it means interest rates will have to rise further. As a result investors may leave Great Britain.

So as you say the UK government’s attempt to avoid recession is basically doomed. What can the country expect in the medium term?

Actually, it doesn’t matter what happens now. Brexit and its consequences are very important. After the June 2016 Brexit vote, we saw companies in the UK and around the world invest significantly less in the country than before. After being more attractive overall until 2016, the UK has fallen sharply behind the Eurozone as a destination for investment. The country is not currently an ideal location for manufacturing there or providing services exported to Europe.

The current plan is also seen as an attempt to get out of the Brexit deadlock. Is it suitable for this?

I find it inappropriate. Program will bring something, deregulation will bring something. But this is secondary to the damage caused by uncertainty about Britain’s future relationship with the EU. So far, Liz Truss lacks the insight to actually move the country forward. Of course, as British conservatives, they find it difficult to admit that Brexit has not happened as promised.

You can listen to the full interview with Holger Schmiding “In the new episode of The Zero Hour“

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