Margaret Thatcher once said that “there is no way in which one can buck the market” – and the effect of Theresa May’s Europe speech on sterling’s value proves the point. The pound has fallen to its lowest level against the dollar since October – “a level the currency has not regularly traded at since 1985” – and the drop is inextricably connected with the contents of the Prime Minister’s speech today. Indeed, sections of it were briefed out as early as Sunday, partly in order, no doubt, to avoid the embarrassment of this fall taking place after its delivery.
You may agree or disagree with the markets’ take, but there is in one sense no disputing with it. The pound’s descent is the consequence of the individual decisions of many people, and to argue with it is not unlike quarrelling with another mass verdict brought about in such a way – a general election result. You may disagree with your fellow voters when they send May or Tony Blair or Thatcher herself to Downing Street (in effect), but your doing so will have no bearing on their decision, any more than spitting in the face of a gale will quell the wind.
But think for a moment about that parallel with an election. The people may come to rue the choice they made, or at least reverse it emphatically later. John Major won more votes in the 1992 election for the Conservatives than Prime Minister for his party in our history. Only five years later, he led that same party to its worst defeat since 1906. Markets wring their hands one day, but can ring the bells the next – or vice-versa. The markets rejoiced when sterling joined the ERM. We know how that one ended.
Indeed, Thatcher’s famous words followed an attempt to tamper with the value of sterling. In that case, the manoeuvre was aimed at stopping it from rising: Nigel Lawson’s shadowing of the deutschmark. It illustrated her general take on sterling: she wanted a strong currency. But it wasn’t always so. At some points during her premiership, she actually wanted the pound to fall – for example, in 1981. As Charles Moore writes in his biography of Thatcher, Geoffrey Howe’s 1981 budget was crafted partly to allow interest rates and the exchange rate to drop.
As some Ministers point out in private, the recent falls in sterling may be opportune. Think about what would happen if they hadn’t happened. As this site has constantly put it, Brexit means short-term pain for medium-term gain – at least, if government and businesses seize the economic opportunities that it will bring. Sterling’s fall is like a shock absorber. It gives exporters a chance to sell more abroad. Were that opportunity not there, the shock would be felt internally – in lower profits and lost jobs.
It is true that a strong currency is better than a weak one. But strength is not to be confused with over-valuation, and it is at least arguable that sterling has been over-valued in recent years – to the benefit of London and finance, but not of the regions and manufacturing (or other services). A fall in the value of sterling may thus turn out to be no bad thing. Ultimately, its shifting value will be decided by the performance of the economy as a whole – and not, to state the obvious, by May’s speech today, whatever effect it may have on the markets.