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13^th May 2015

The Euro Referendum Crisis

Does the UK face a currency crisis?

I have never bought the myth that the Conservatives have some superior understanding of running the economy. They have presided over a more busts than their opponents and had the good fortune of losing power before the consequences of some of their other economic decisions had fully developed. But that is for another blog. The current chancellor George Osborne has done nothing in the last five years to place him above his predecessors. In fact his record has been quite woeful and the current 'good' times are down to a mini property boom of his making. As property was a major cause of the last crash and the other economic fundamentals have not changed much it is unlikely to end well. This may have been a clever move had the new money, created from mortgage interest, ended up funding manufacturing but this has not been the case and it has gone into an already oversized service sector. What we now have is the unsustainable position of an industrial base that is too small to support our service sector. Of course the shortfall is made up with imports. This should only be a temporary measure while the economy adjusts but it has now become the norm. The trade deficit has been growing over a number of years but in December 2014 it reached levels that in the past would have triggered a currency crisis. That it has not yet happened is a great mystery. I doubt that our good fortune is down to the generosity of our foreign creditors and more to do with the London property market being a safe place to store their wealth in turbulent times.

If property is the key to this economic corundum then it works on the basis that the foreign investors can always sell on in a rising market. We have moved on significantly from the point where the current prices could be supported by locals so property values are purely down to speculative nature of the superrich. However in a bubble even the superrich will eventually be priced out. There is another aspect to this bubble and that is the glut of new developments like Battersea. These are generally being funded by off plan buyers who have secured units by placing a deposit. Much like a futures contract these deposits are tradable where the eventual buyer is responsible for the final payments. Like any market where leverage is used the value attributed to the deposit is not that paid but the total once completed. This in turn pushes neighbouring properties prices but there is no guarantee that this will be the final price. With speculation for the first few units and then a glut it is likely that prices will fall with predictable consequences.

The risks aside the pounds international value is now linked with the London property market. Currently a virtuous circle exists where a strong pound supports the London property market and a strong London property market supports the pound but it can easily turn the other way. A weak pound leads to a weak property market as speculators sell up and move their money out of the country. For it to happen there will need to be a better place to invest and this may just be happening with European Stock markets rising. Whatever we now live in precarious times when any financial crisis could trigger a collapse in the pound's value and we may be approaching such a crisis. The Tory's win in the general election makes a referendum on Britain's place in Europe all the more likely. During the election campaign there were some voices from the exporting business community that even the possibility of a referendum was being taken by some of their customers as a move to leave Europe. In the current climate leaving the EU and a referendum is one and the same thing to external investors. And this is a big issue for a country which depends on much of its investment because of its access to Europe. That the referendum will lead to a drop in foreign investment is a given. With our home grown industry contracting the deficit can only get larger. Whether referendum leads to currency collapse is uncertain but it will bring us closer to the precipice.