May be there is something peculiarly British about post-Christmas depression, but like almost exactly a year ago, there is much talk of the pound lurching towards parity with the euro (see e.g. Cheap Britannia!). Some economists, perhaps the same ones as last year, are predicting that the pound may fall below parity.
My metaphysical and utterly useless crystal ball tells me that the pound could fall below parity. This time last year, we lived in a world of uncertainties. It was difficult to predict which policies were going to work and which ones were not. The whole economic picture was extremely unclear. This year, it looks slightly clearer. Britain has done badly compared to many other economies – the UK was still in recession in Q3 – and there are worries about public sector debts.
Any government that comes to power after the general election will have to inflict real pain. Most voters realize this, but they don’t seem to like hearing tough messages from the political parties. Whether this is a psychological need to hear from politicians that ‘everything will be OK’ or not, I have no idea, but muddled talk on the economy may do Britain and its currency enormous harm. There is a bit of a dilemma for the UK politicians: lose an election by being tough on public spending but enhance the credibility of the state, or win an election while losing credit. The danger is that credibility could be lost before the election, and the hands of the incoming governemnt will be tied, that it won’t be able to fulfil its promises, leading to further disenchantment with politics.
Well, cheer up, the world isn’t going to end, just yet.