EU Officials Concerned About Risks of Pound Drop (Update4)
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By Meera Louis
Feb. 25 (Bloomberg) -- European Union officials are concerned that the poundâs slide to a record low against the euro could destabilize the British economy, according to a document prepared last month by European Commission and EU finance ministry officials.
The poundâs âvery rapidâ drop âraises questions about the financial stability of the British economy,â said the document, which was prepared ahead of the Feb. 14 Group of Seven meeting in Rome and obtained by Bloomberg News. The currencyâs weakness âis a source of concern for the euro area.â
The report contradicts Prime Minister Gordon Brownâs argument on Feb. 13 that a weaker currency helps rather than hinders the economy. With the pound down 18 percent against the euro in the past year, it also underscores investorsâ concern about Britainâs fiscal health as the government racks up debt to fund bank bailouts.
The one-page document, titled âRecent exchange rate developments - G7 preparation,â was circulated at a meeting of EU officials before the G-7 gathering in Rome. The document also outlined the EUâs position on the U.S. dollar, the yuan and the yen before discussing the pound.
The Obama administrationâs expressed support for a âstrong dollarâ is âreassuring,â the document says. It also calls for a âcontinued real effective appreciationâ of the yuan against the euro. Japanese authorities âshould not intervene to reverse the past appreciation of the yen,â it says.
Poundâs Slump
The document signals concern among euro-area policy makers that the poundâs slump could push their 16-nation economy deeper into a recession by undermining exports to its biggest trading partner.
Gross domestic product in Britain contracted 1.5 percent in the fourth quarter, the most since 1980, as companies and consumers reduced spending, the Office for National Statistics said today. The economy shrank 1.9 percent on the year.
A U.K. Treasury official who declined to be named said the government doesnât comment on movements in currency markets.
Policy makers âshould be alive to the possibility that weakness in the pound will just scare off foreign investors,â Neil Mackinnon, chief economist at ECU Plc in London and a former U.K. Treasury official, said in an interview on Bloomberg Television today. âThe U.K. economy is certainly in a recession if not a mini depression.â
The U.K. currency fell 23 percent against the euro last year as confidence in Britainâs fiscal health weakened, export demand dried up and Bank of England cut interest rates to records. The pound reached a record low of 98 pence per euro in late December. It traded at 88.87 pence per euro at 12:12 p.m. in London.
âMore Competitiveâ
âAs the pound has gone down, weâre more competitive,â Brown said Feb. 13. âWeâre not trying to target the exchange rate like people used to do.â
At the same time, his government has taken on liabilities that may amount to 1.5 trillion pounds ($2.2 trillion) as it tries to prop up the financial system and rescue banks such as Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc.
Nigel Lawson, the longest serving chancellor of the exchequer under Margaret Thatcher, said yesterday the U.K. government may have to introduce âa short period of nationalizationâ for some banks.
Europeâs officials are concerned that global currency volatility could roil markets and destabilize their economies.
âExceptionally high volatility and unprecedented sharp moves in the foreign-exchange market have adverse implications for economic and financial stability and are especially unwelcome in the current economic environment,â the draft document said. âIn a context of low inflation in all major economies, any large moves will translate into big real exchange rate swings that could lead to competitive distortions.â
French and Irish finance ministers have already openly questioned the U.K.âs management of its currency.
Franceâs Christine Lagarde said Jan. 21 that the Bank of Englandâs monetary policy âisnât very efficient in providing more supportâ for the pound. Irelandâs Brian Lenihan said that Britain is engaging in âcompetitive devaluation.â
To contact the reporter on this story: Meera Louis in Brussels at mlouis1@bloomberg.net
Last Updated: February 25, 2009 07:20 EST
Email | Print | A A A
http://www.bloomberg.com/apps/news?pid=20601087&sid=aRteM6QaDSpY&refer=home
By Meera Louis
Feb. 25 (Bloomberg) -- European Union officials are concerned that the poundâs slide to a record low against the euro could destabilize the British economy, according to a document prepared last month by European Commission and EU finance ministry officials.
The poundâs âvery rapidâ drop âraises questions about the financial stability of the British economy,â said the document, which was prepared ahead of the Feb. 14 Group of Seven meeting in Rome and obtained by Bloomberg News. The currencyâs weakness âis a source of concern for the euro area.â
The report contradicts Prime Minister Gordon Brownâs argument on Feb. 13 that a weaker currency helps rather than hinders the economy. With the pound down 18 percent against the euro in the past year, it also underscores investorsâ concern about Britainâs fiscal health as the government racks up debt to fund bank bailouts.
The one-page document, titled âRecent exchange rate developments - G7 preparation,â was circulated at a meeting of EU officials before the G-7 gathering in Rome. The document also outlined the EUâs position on the U.S. dollar, the yuan and the yen before discussing the pound.
The Obama administrationâs expressed support for a âstrong dollarâ is âreassuring,â the document says. It also calls for a âcontinued real effective appreciationâ of the yuan against the euro. Japanese authorities âshould not intervene to reverse the past appreciation of the yen,â it says.
Poundâs Slump
The document signals concern among euro-area policy makers that the poundâs slump could push their 16-nation economy deeper into a recession by undermining exports to its biggest trading partner.
Gross domestic product in Britain contracted 1.5 percent in the fourth quarter, the most since 1980, as companies and consumers reduced spending, the Office for National Statistics said today. The economy shrank 1.9 percent on the year.
A U.K. Treasury official who declined to be named said the government doesnât comment on movements in currency markets.
Policy makers âshould be alive to the possibility that weakness in the pound will just scare off foreign investors,â Neil Mackinnon, chief economist at ECU Plc in London and a former U.K. Treasury official, said in an interview on Bloomberg Television today. âThe U.K. economy is certainly in a recession if not a mini depression.â
The U.K. currency fell 23 percent against the euro last year as confidence in Britainâs fiscal health weakened, export demand dried up and Bank of England cut interest rates to records. The pound reached a record low of 98 pence per euro in late December. It traded at 88.87 pence per euro at 12:12 p.m. in London.
âMore Competitiveâ
âAs the pound has gone down, weâre more competitive,â Brown said Feb. 13. âWeâre not trying to target the exchange rate like people used to do.â
At the same time, his government has taken on liabilities that may amount to 1.5 trillion pounds ($2.2 trillion) as it tries to prop up the financial system and rescue banks such as Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc.
Nigel Lawson, the longest serving chancellor of the exchequer under Margaret Thatcher, said yesterday the U.K. government may have to introduce âa short period of nationalizationâ for some banks.
Europeâs officials are concerned that global currency volatility could roil markets and destabilize their economies.
âExceptionally high volatility and unprecedented sharp moves in the foreign-exchange market have adverse implications for economic and financial stability and are especially unwelcome in the current economic environment,â the draft document said. âIn a context of low inflation in all major economies, any large moves will translate into big real exchange rate swings that could lead to competitive distortions.â
French and Irish finance ministers have already openly questioned the U.K.âs management of its currency.
Franceâs Christine Lagarde said Jan. 21 that the Bank of Englandâs monetary policy âisnât very efficient in providing more supportâ for the pound. Irelandâs Brian Lenihan said that Britain is engaging in âcompetitive devaluation.â
To contact the reporter on this story: Meera Louis in Brussels at mlouis1@bloomberg.net
Last Updated: February 25, 2009 07:20 EST