Sterling is being debauched

Britain is happy with a weak pound. But debauching sterling isn't a solution, says Matthew Lynn. It's part of the problem.

How low can the pound sink? At the start of this decade, a pound bought €1.70. At the start of this week, it bought only €1.08. Parity with the euro, unimaginable when the single currency was launched, looks inevitable within the next few months. Right now, Britain is happy with that. The government looks on with benign neglect. The governor of the Bank of England, Mervyn King, even seems to be talking the currency down. Devaluation is seen as part of the policy mix, along with printing money, that will eventually lead to recovery. And the markets have been more than happy to oblige.

Sterling is the new whipping boy of the trading floors. Its weakness against the dollar has been masked, to a degree, by the frailty of the US currency. But it is its value against the euro, the currency in which most of Britain's trade is carried out, that reveals how friendless sterling has become. It has been falling steadily against the single currency for most of this year. After recovering slightly from the all-time low of €1.02 at the height of the financial crisis, it has resumed its decline. Parity now looks a certain bet. In many ways, that's a rational response to the dismal economic outlook the UK now faces. France and Germany were badly hit by the crisis, but their economies are starting to recover. Their public-sector deficits, while serious, are nothing like as bad as the UK's. Their economies weren't anywhere near as dependent on the bubbles in property and finance. And the European Central Bank has proved a far sturdier defender of monetary stability than the Bank of England.

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Matthew Lynn

Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years. 

He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.