The weak pound against the Euro stimulates exportation for UK manufacturers fulfilling the hopes of the government in the ongoing attempt of national economic recovery.
When we hear that the pound has weakened again against the Euro, our holiday to Europe seems that little more painfully expensive. A stroll across the Grand Canal in Venice or a swim in the Mediterranean remains just a dream when we consider just how weak the pound is….From an economic point-of-view, the weak pound opens up opportunity for the UK as a country, despite being disappointing for British people hoping to travel abroad .
How did the pound get so weak?
‘The Telegraph’ blames the long-term weakness in sterling on the extensive national debt and extreme measures being taken to rebalance the UK economy. Furthermore, economist Erik Britton, predicts that, ‘…depreciating we have seen so far is a permanent shock’. This is something that could therefore probe problem for the recovery of the UK in the current recession. A reaction to this, one would think, would be fear. Yet, economists still continue to argue that the weak pound is just what the UK needs. Using the pound against the Euro as an example, it was at its strongest in January 2007 when it reached 1.53. However, the implications of the recession caused the worth of the pound to drop to an all time low of 1.05 in January 2009.
What does the weak pound mean for the UK?
Industry benefits
Opinions of the majority of economists are that the weak pound sparks a strategic increase in exports from the UK and therefore a potential increase in sales for industries across Britain. For European and American companies who are benefiting from a stronger currency compared to the pound, they have been able to purchase higher levels of resources from the UK for a considerably lower prices. This advantage for the UK has not be favoured by everyone with the French Economy Minister Christine Lagarde (Reuters, 2009) arguing that it is "unfair" for the UK to take advantage of cheaper exports for foreign traders. Does the UK care?.......No
In response to such comments, the UK dispute that increased exports has enabled large manufacturers situated in the struggling UK to “keep-their-head-above-water” during the economic crisis. Vicky Redwood from Capital Economics, a consultancy company, commented in a news report that the competitiveness between UK exporters has intensified due to increased demand from foreign buyers, which in the long run can lead to greater efficiency and productivity. Couldn’t this support the UK through recovery?
Tourism benefits
Anyone living in London would have surely recognized an increase in European and American tourists. With the opportunity for them get more value for their money; London has never seemed so cheap. On the other end of the spectrum, English people cannot afford to go abroad as the Euro and Dollar have become so expensive to purchase. Henk Potts of Barclays Wealth concludes that this has lead to increased sales in holiday destinations in the domestic market. Furthermore, low-cost UK based resorts such as Pontins and Butlins are performing better as British people are choosing to holiday at home.
Ironically, is the weak pound working out for the UK?
As a textbook would say, a country experiences a weak currency, so their exports begin to increase and in return the country’s economy starts to recover. Right? A recent article published by ‘The Telegraph’ suggests that the textbook theory is not quite working out for the UK. Although exports were growing in early 2009, a recent report published by the Office of National Statistics in September showed that exports are not as prosperous as hoped by the government. Reason being, according to Edmund Conway, is that countries (EG: Germany, France and America) who would normally “snap-up” the opportunity of cheap exports from the UK, have been so deep in the recession that they have not been financially able to do so. The government’s hopes of greater exports have been shattered.
My final opinion would be that a desperate UK has been holding onto any glimpse of positive activity for the economy during the recession. Although economists have been responding to the news of the weak pound with the “text book” theory of exchange rates, it would seem that the UK were unconscious to the global recession and instead focused on the national recession forgetting that as foreign traders would not be in a financial position to import from the UK. Finally, the problems with strength of the pound, may give them a drive towards converting to the Euro in many years to come, once the worth of the pound has strengthened.
Sources:
http://www.reuters.com/article/usDollarRpt/idUSLM16726720090122
http://uk.biz.yahoo.com/02032009/389/six-reasons-weak-pound-good-economy.html
http://www.telegraph.co.uk/finance/currency/6234980/Weak-pound-is-permanent--economists-warn.html
As ever, well argued and well researched. 7/10
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