How much will these coins actually be worth? That’s not as simple a question. After Britain’s Office for National Statistics announced last Friday that the country’s economy shrank for the first time since 2012, the value of the pound dipped to a 10-year low against the euro. At the time of writing, a pound is worth about 1.08 euros and $1.21, only marginal improvements on last week’s lows.
In a sign of the worry about Brexit’s impact on the value of the country’s currency, a group of British Conservative lawmakers wrote to new Prime Minister Boris Johnson to ask that he clarify that he would accept a compromise in negotiations with the E.U., rather than go straight for a “no-deal” scenario. “This will reassure not only us, but also the currency markets,” read the letter, which was signed by former treasury head Philip Hammond and 20 others.
However, many analysts predict the value of Britain’s currency will dip further in the months ahead, as Britain heads toward what looks likely to be a disruptive and unpredictable no-deal Brexit, with the country reverting to World Trade Organization rules on border controls. Some, though not all, suggest the British pound could eventually end up at parity with the U.S. dollar.
That would be a remarkable, unprecedented change for the pound. In the run-up to the June 2016 referendum, the pound-to-euro rate was about 1.32 euros, while the pound was approximately $1.50 against the U.S. dollar. In the years before the 2008 financial crisis, the British pound was stronger still, peaking at around 1.50 euros and $2.11.
For many Britons, the collapsing pound may be the most visceral evidence of the economic damage wrought by Brexit. A pound that is worth less can buy less abroad, affecting everything from vacations to grocery shopping and plenty more.
At British airports, where many heading out on summer holidays exchange their money, the rates given for exchanging pounds to euros or other currencies are far lower than on the open market: In late July, Travelex desks at Heathrow Airport were offering just 0.91 euros for each pound. Given British travelers as a whole can spend as much as $55 billion during overseas trips, even small shifts in exchange rates can seriously add up.
There are knock-on effects. On the Beach, a British package holiday company, saw the value of its stock nosedive Friday as it had not hedged against a falling pound. “These relative price increases make it difficult for the group to gain share of market while maintaining margins,” the company said in a statement.
A falling pound has made imported food more expensive in the past. The Institute for Fiscal Studies estimates that between 2007 and 2008, when there was a 21 percent depreciation in the effective sterling exchange rate, there was an 8.7 percent increase in the price of food relative to other goods.
Indeed, this appears to already be happening. A 2017 report produced by the London School of Economics estimated the Brexit vote the year before had “led to an increase in aggregate UK inflation by 1.7 percentage points in the year following the referendum.” A no-deal Brexit would add to this problem, as it could add tariffs to imported foods.
There are certainly silver linings to a low pound. On a macro scale, a lower pound should help British companies that export goods. Tourists in London, or residents paid in foreign currencies, may find one of the world’s most infamously extravagant cities a little easier on the wallet. However, given that Britain imports more than it exports, and its outgoing British tourists spend more than incoming foreign ones, that is little reprieve.
Surprisingly, the falling pound doesn’t appear to have been hit specifically by economic factors: Many of the leading indicators for Britain remain relatively strong. Instead, analysts say, the pressure on the pound is political in nature, a result of lingering uncertainty about the possibility of Brexit negotiations and the potential for another election.
For Johnson, who took over as prime minister last month, both keeping the option of a no-deal Brexit open and floating the possibility of a general election are key aspects of his political plan. Combining this brinkmanship with the general worries about the global economy — U.S. stocks tumbled at opening Wednesday on fears of a recession, while Germany announced its economy had shrunk on the same day — could keep the pound low for a while.
Can it recover? Certainly. If a Brexit deal is reached, the pound will see some recovery.
The British pound’s strength for decades was a reminder of the era of imperial strength. For a long time, the pound was stronger than it might have been expected to be; within Johnson and other politicians’ lifetimes, it was worth more than $3. For all the talk in Britain of taking back control and returning to the glories of bygone eras, the low ebb of the pound is a sign: Things change.
Want smart analysis of the most important news in your inbox every weekday, along with other global reads, interesting ideas and opinions? Sign up for the Today’s WorldView newsletter.