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Good discussion.  Coincidentally I have a diary up on the same topic written from a more Irish perspective. The main point is that Brexit has already been a disaster for the UK economy, with only a radical Sterling devaluation masking a huge decline in UK GDP, real incomes, and consumer spending.  And yet pro-Brexit economists are still touting the UK's "growth" in Sterling terms and record employment as evidence that all is well...

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Aug 21st, 2017 at 10:47:12 AM EST
Prof. Patrick Minford from Economists for Free Trade was on Channel 4 News yesterday crowing that no-deal Brexit will be fantastic because sterling devaluation has made the UK much more competitive and brought about a manufacturing boom (and will buy time to improve productivity), so we should have zero import duty and say goodbye to the high prices forced on us by EU protectionism.
David Davis has warned that the clock is ticking on Brexit - Professor Patrick Minford from Economists for Free Trade tells Channel 4 News that leaving the EU without a trade deal would bring a 135-billion-pound boost to the economy.
by Gag Halfrunt on Mon Aug 21st, 2017 at 11:57:26 AM EST
[ Parent ]
Yea that was the article i was referring to but couldn't find again when I was writing my comment above. If devaluation is such a wonderful boost to the economy, then they already have its benefits without ever having to leave the EU!

Devaluation also effectively imposes an import duty on imports by adding 18% to their price in Sterling terms.  So far the response of CPI to this has been muted - barely rising to 2.6% but presumably this will increase further as the rising cost of imported goods feeds through the supply chain.

Historically most economists regard devaluation as a useful short-term safety valve to reduce the impact of an economic crisis and to facilitate faster recovery. However longer term its benefits erode as increased import costs feed into inflation and output prices.

What is perhaps more remarkable is the degree to which the UK economy has failed to respond to the stimulating effects of such a large devaluation which indicates their are structural problems in the UK economy which devaluation is only masking for the time being.

The other surprising thing is that foreign investors and creditors aren't pulling their assets out of Sterling more rapidly in response to such a massive loss of value.  I would expect a massive Sterling crisis when they start to do so to a much larger extent.

A breakdown in Brexit negotiations could be the trigger for such an event posing even greater difficulties for EU exporters to the UK.

Increasingly the end of the A50 period can't come quickly enough for EU industries if it means they will become less exposed to low cost UK competition enabled by Sterling devaluation.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Aug 21st, 2017 at 12:27:38 PM EST
[ Parent ]
The devaluation is a defensible policy, in many situations a proper vehicle to protect common folk from economic shock. There is a world of difference between loosing 20% of your income and losing your job.

The problem here is the widening of the trade deficit at the same time. This means Sterling is not venting all the pressure building in the system.

You might find me At The Edge Of Time.

by Luis de Sousa (luis[dot]a[dot]de[dot]sousa[at]gmail[dot]com) on Mon Aug 21st, 2017 at 01:10:37 PM EST
[ Parent ]
Yes, devaluation s a sensible policy from the UK point of view, but from an Irish/EU perspective it risks devastating industries dependent on exporting to the UK or competing with UK exports in EU markets in a customs & tariff free environment. Tariffs, whether WTO or otherwise, cannot come quickly enough if they are to survive in an environment where UK goods suddenly have a 30% cost advantage. Another reason why an A50 extension is unlikely.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Aug 21st, 2017 at 05:07:08 PM EST
[ Parent ]

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