Tuesday, January 06, 2009

Whither Britain in the Crisis?

James Meek, on the best and worst case scenarios for Britain in the ongoing financial crisis:
In the best scenario, the financial system starts to function again, albeit more responsibly than before; job losses tail off towards the end of the year after another half million people have got their P45s; house prices bottom out; inflation plummets to nearly zero, without slipping lower into the menace of deflation; the faint possibility of Britain balancing its books glimmers in the distance; and the benign side of Britain's non-membership of the euro comes into play. Because we're not in the euro, our currency can fall against it - the pound has already fallen by a quarter against the euro in the past few weeks - making it less likely we'll buy wine from France or cars from Germany or hotel rooms from Spain, and cheaper for Europeans to buy whisky from Scotland or aircraft engines from Derby or hotel rooms in Cornwall. In short, we muddle through.

The worst case is the Icelandic scenario: foreclosure on Britain. That's where the dark side of not being in the euro might emerge. Like most countries, Britain is in debt to its own citizens, and to the rest of the world. That debt is backed up by two things - confidence in the value of Britain's assets, its land and factories and skilled people, and confidence in Britain's future prosperity. That's fine as long as the confidence is maintained. But if the rest of the world decides Britain's debt is out of proportion to its actual worth, things can turn nasty very fast, and a country can find itself, like some impecunious homeowner, being judged not on hopes and prospects but on the repossession value of the house and the auction value of the furniture. Doubt abroad about what we are really worth has already set in. If you're a homeowner, in sterling terms, your house is worth, on average, 12% less than it was this time last year. But from the euro-denominated point of view, your house has fallen in value by another 25%.
The U.S. faces a pretty similar situation.

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