tag:theconversation.com,2011:/fr/topics/uk-currency-8983/articlesUK currency – The Conversation2018-03-19T14:41:33Ztag:theconversation.com,2011:article/935002018-03-19T14:41:33Z2018-03-19T14:41:33ZWhy the UK should get rid of 1p and 2p coins<figure><img src="https://images.theconversation.com/files/210978/original/file-20180319-31621-1hvrwc5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">shutterstock.com</span></span></figcaption></figure><p>The question of whether or not to scrap 1p and 2p coins has been raised once again in the UK, <a href="http://www.bbc.co.uk/news/business-43388662">following a recent Treasury report</a>. Public outcry ensued and the government was forced to reassure the country that <a href="https://www.theguardian.com/business/2018/mar/14/no-plans-scrap-1p-2p-coins-downing-street-says">it would not go ahead with the idea</a> as it could hurt charities, small businesses and arcades, which rely on people spending their spare change. </p>
<p>This makes little sense. The UK should follow the lead of several other countries, which have ditched their low denomination coins, including <a href="http://www.bbc.co.uk/news/business-36226813">Ireland</a>, <a href="https://edition.cnn.com/2012/03/30/business/canada-penny/index.html">Canada</a>, <a href="https://myaccount.news.com.au/sites/heraldsun/subscribe.html?sourceCode=HSWEB_WRE170_a_GGL&mode=premium&dest=http://www.heraldsun.com.au/news/victoria/its-been-25-years-since-australias-smallest-coins-were-removed-from-circulation/news-story/9263c4e1fba886fddc7fbe634dfde1ac?nk=83153c069ba7453b39a6287c2a1e27a6-1521457063&memtype=anonymous">Australia</a> and Sweden, among others. They serve little purpose in the economy today, are wasteful, and it’s hard to see how small businesses and charities could not adapt to a world without them.</p>
<p>The British public’s reticence to scrap its copper coins is tied to <a href="http://www.bbc.co.uk/news/business-43399416">a number of reasons</a>. The majority of these are sentimental and link the penny to “British values”. But, when it comes to playing their role as money, the coins have lost their value.</p>
<p>Money serves as a medium of exchange, a store of value, and as a unit of account. Originally money was minted from <a href="https://www.sciencedirect.com/science/article/pii/S1057521917300480">precious metals</a>, like gold and silver. With time, precious metals were replaced by other metal blends, and the intrinsic value of coins diminished. </p>
<p>When the penny was introduced as a unit of currency in the UK in 1971, a pint <a href="https://www.mirror.co.uk/money/britain-within-weeks-scrapping-1p-10715549">of milk cost 5p</a>. Today, average prices have gone up significantly. Nowadays pennies are worth virtually nothing (even penny sweets cost more than a penny now) and can serve only as a unit of account.</p>
<p>One of the biggest groups to complain about the loss of pennies has been small charities. <a href="https://www.theguardian.com/society/2018/mar/14/keep-the-pennies-they-are-worth-millions-of-pounds-charities-say">They say</a> they get huge amounts in donations from them. But if charities are to survive, they must explore alternative and innovative ways of fundraising. Similarly, small businesses must offer electronic payments to their customers to stay competitive. Good business is all about efficiency and competition at the end of the day. </p>
<p>Also, those people who want to donate to charity will keep donating using other coins. Similarly, those who prefer card payments would carry less cash to donate in their wallets regardless.</p>
<p>Digital payments, for their short period of existence, are already responsible for <a href="https://www.theguardian.com/money/2017/jul/12/cash-contactless-payments-uk-stores-cards-british-retail-consortium">more than half</a> of all payments in the UK. <a href="https://www.theguardian.com/money/2018/feb/19/peak-cash-over-uk-rise-of-debit-cards-unbanked-contactless-payments">Contactless</a> payments have pushed this trend even further. Getting rid of 1p and 2p coins is just a natural response to this trend – and it will save tax payers money. </p>
<h2>Lost pennies</h2>
<p>The Royal Mint, which produces the country’s coins, does not release details of the cost of minting pennies. They were mostly made of copper until 1992, which would have made them cost more to make than their monetary value. Now they are made from a copper-plated steel. Figures for the US show that a one-cent piece cost <a href="http://www.dailymail.co.uk/news/article-4286104/Pennies-cost-make-worth-1-5-cents.html">the US Mint 1.5 cents</a> to produce in 2016 (but these are made from copper-plated zinc).</p>
<p>So it’s hard to say if pennies cost the taxpayer in this sense. But a big issue with pennies is the fact that nobody really spends them. Despite claims that the penny is a valued part of British culture, literature and history, statistics show little love for these coins. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/210982/original/file-20180319-31621-1j5tm1u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/210982/original/file-20180319-31621-1j5tm1u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/210982/original/file-20180319-31621-1j5tm1u.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/210982/original/file-20180319-31621-1j5tm1u.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/210982/original/file-20180319-31621-1j5tm1u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/210982/original/file-20180319-31621-1j5tm1u.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/210982/original/file-20180319-31621-1j5tm1u.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">A lot of pennies never get spent.</span>
<span class="attribution"><span class="source">shutterstock.com</span></span>
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</figure>
<p>Around <a href="https://www.telegraph.co.uk/news/2018/03/14/government-offers-reassurance-pennies-stay/">8% of coppers</a> are thrown in the bin every year. According to the Royal Mint, there are 11,430m 1p coins (worth £114.29m) and 6,714 2p coins (worth £134.273m) in circulation so 8% would lead to substantial waste. Millions more end up behind sofas or tucked away in tins and forgotten about. Replacing them is surely a waste of money.</p>
<p>Another popular area of concern is that cutting out pennies (and rounding up or down as a result) will cause inflation. But even this fear that retailers would take advantage of a change in currency to round prices up is mistaken. Retailers already use <a href="https://www.cbsnews.com/media/7-pricing-tricks-that-make-you-spend-more/">the 99p trick</a> to make products look cheaper and encourage customers to purchase it. Rounding up will give people more realistic and honest information about prices. It would help us buy fewer things that are not within our budgets.</p>
<p>Another trend that cannot be ignored is the rise of digital money. Cryptocurrencies challenge the idea of traditional money, how it is managed by central banks and also transforms our understanding of money. They might be a way off from entirely replacing traditional money, but the growth of cryptocurrencies and other forms of digital payments symbolise the increasing obsolescence of 1p and 2p coins.</p><img src="https://counter.theconversation.com/content/93500/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Larisa Yarovaya does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>When the penny was introduced in 1971, a pint of milk cost 5p. You can’t buy anything with pennies anymore.Larisa Yarovaya, Lecturer in Accounting and Finance, Anglia Ruskin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/770522017-05-05T12:52:28Z2017-05-05T12:52:28ZHard Evidence: does a lower pound boost manufacturing?<figure><img src="https://images.theconversation.com/files/168086/original/file-20170505-21007-1hdbv5i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">shutterstock.com</span></span></figcaption></figure><p>The idea that a lower currency boosts manufacturing and a country’s exports is pervasive. So the <a href="http://www.bbc.co.uk/news/business-36956418">15% fall in the pound</a> following the UK’s Brexit vote is seen by many to be beneficial for this section of the economy. Economics 101 says that a weaker currency makes it cheaper for foreign buyers to purchase domestic goods and so makes them more attractive and benefits manufacturers as a result. </p>
<p>Unfortunately, economics is rarely this straightforward. Students of John Maynard Keynes at Cambridge University learned this the hard way in the 1930s. Those taking notes during one of his lectures would be liable to turn up the following week only to be told to tear up their old lecture notes on the grounds that Keynes had given the matter some more thought or that the facts had changed and therefore <a href="https://www.ft.com/content/64b72c78-caa5-11e1-89be-00144feabdc0">so had the economic theories</a>. </p>
<p>When assessing the idea that manufacturers benefit from the Brexit blow to the pound, it is important to use Keynes’s flexible approach. Those excited about Brexit are confident that sterling’s depreciation will boost manufacturing, which accounts for <a href="https://www.eef.org.uk/campaigning/campaigns-and-issues/manufacturing-facts-and-figures">45% of UK exports</a>. Indeed, export orders are rising, and the latest data <a href="http://news.sky.com/story/weak-pound-prompts-manufacturing-growth-spurt-10860293">shows strong demand</a> from customers in North America, Europe, Africa and Brazil, as a result of the weak pound.</p>
<p>The problem is, the lower pound also raises the price of imported raw materials. This then raises the cost of manufacturing, which eventually gets passed onto the price consumers pay for goods. So, as well as reporting strong growth, manufacturers <a href="http://www.cbi.org.uk/news/uk-manufactured-goods-in-demand-with-strong-domestic-and-export-performance/">anticipate</a> a significant slowdown in domestic demand in the near-term. </p>
<p>To allow for this we need to plot manufacturing production together with UK real price competitiveness. And to do this we use a “real effective exchange rate”, which captures sterling’s trade-weighted movements by taking into account the domestic relative to the foreign cost of living (based on the <a href="https://www.ons.gov.uk/economy/inflationandpriceindices">Consumer Price Index</a>). </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/167549/original/file-20170502-17248-996tou.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/167549/original/file-20170502-17248-996tou.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=430&fit=crop&dpr=1 600w, https://images.theconversation.com/files/167549/original/file-20170502-17248-996tou.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=430&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/167549/original/file-20170502-17248-996tou.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=430&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/167549/original/file-20170502-17248-996tou.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=540&fit=crop&dpr=1 754w, https://images.theconversation.com/files/167549/original/file-20170502-17248-996tou.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=540&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/167549/original/file-20170502-17248-996tou.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=540&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Manufacturing production and real effective exchange rate, monthly data, 1968-2017.</span>
<span class="attribution"><span class="source">Data: ONS and Bank of International Settlements database</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>Focusing on the real price competitiveness addresses higher manufacturing costs. As the graph above shows, there is a clear negative correlation that suggests that manufacturing does benefit from a lower real exchange rate. The clearest example is from 1980 to early 1981. Indeed, <a href="http://www.bankofengland.co.uk/boeapps/iadb/Repo.asp">a number of earlier interest rate hikes</a> by Margaret Thatcher’s government to <a href="https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/czbh/mm23">bring down rising inflation</a> strengthened the pound and led to a significant decline in manufacturing (along with a UK recession).</p>
<p>So although manufacturing benefits from a lower pound, it does not get as much of a boost as manufacturers may hope. Real competitiveness has only improved by 9% since the referendum. This is much lower than the <a href="http://www.bbc.co.uk/news/business-36956418">15% depreciation</a> in the nominal exchange rate often quoted by the press.</p>
<h2>Rising volatility</h2>
<p>Market volatility is another factor to take into account when it comes to whether or not manufacturers get a boost from a currency devaluation. Price competitiveness comes at the cost of rising volatility.</p>
<p>As the graph below shows, spikes in volatility have caused sudden falls in manufacturing production over the years. Consider, for example, another famous exit in Britain’s economic history. Following the UK’s humiliating exit from the European Exchange Rate Mechanism (ERM) on <a href="http://news.bbc.co.uk/onthisday/hi/dates/stories/september/16/newsid_2519000/2519013.stm">Black Wednesday, September 16, 1992</a>, there was a sustained increase in volatility for almost a year. This meant that the significant benefits of the 9% improvement in real price competitiveness over that period translated only to a 0.7% boost in manufacturing. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/167550/original/file-20170502-17275-179551t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/167550/original/file-20170502-17275-179551t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=437&fit=crop&dpr=1 600w, https://images.theconversation.com/files/167550/original/file-20170502-17275-179551t.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=437&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/167550/original/file-20170502-17275-179551t.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=437&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/167550/original/file-20170502-17275-179551t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=550&fit=crop&dpr=1 754w, https://images.theconversation.com/files/167550/original/file-20170502-17275-179551t.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=550&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/167550/original/file-20170502-17275-179551t.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=550&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Manufacturing production and real effective exchange rate volatility, monthly data, 1968-2017. Volatility is measured by the rolling two-year standard deviation of the real effective exchange rate.</span>
<span class="attribution"><span class="source">Costas Milas and Gabriella Legrenzi</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span>
</figcaption>
</figure>
<p>Sterling’s volatility reflects UK policy uncertainty which, following the triggering of Article 50, is set to increase over the next two years due to potentially unsettling negotiations with the EU. Until a Brexit deal is concluded with the EU, manufacturers face uncertainty over their earnings and future investments. </p>
<p>With Brexit negotiations set to experience ups and downs (especially after Theresa May’s promise to be <a href="http://www.bbc.co.uk/news/uk-politics-39784170">“a bloody difficult woman”</a> during Brexit talks), it is extremely likely that exporters will spend considerable time trying to hedge against exchange rate risk, rather than pursuing profitable investments in manufacturing. And, as Brexit negotiations become challenging, British businesses will also face rising borrowing costs because nervous investors will require a higher yield to trust UK bonds. </p>
<h2>Verdict</h2>
<p>Manufacturing benefits from a weak but stable exchange rate and low borrowing costs. Exports have benefited from the low pound since Brexit, but not as much as it first appears. And volatility will prevent UK manufacturers from capitalising on the weak currency. </p>
<p>In the longer-term, it’s worth noting that UK manufacturers are also highly dependent on <a href="http://www.bbc.co.uk/news/uk-politics-39576112">EU migrants for their workforce</a> and <a href="https://www.ft.com/content/7dc9a004-c6c4-11e6-8f29-9445cac8966f">regulation that meets EU requirements</a>. If neither of these are guaranteed when the UK leaves the EU, UK manufacturers are set to suffer significantly from this too.</p><img src="https://counter.theconversation.com/content/77052/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>In 2012, Costas Milas was the principal recipient of a Bank of England Research Donations Committee Grant (bid for £5,604). Title of the project: “Liquidity and output growth in the UK”. Duration of the project: five months. Any views expressed here are his.</span></em></p><p class="fine-print"><em><span>Gabriella Legrenzi has received research funding from the Italian government. Any views expressed here are hers.</span></em></p>The high cost of imports and borrowing, as well as market volatility mean manufacturers aren’t in for an easy ride.Costas Milas, Professor of Finance, University of LiverpoolGabriella Legrenzi, Senior lecturer in economics, Keele UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/670072016-10-13T13:25:40Z2016-10-13T13:25:40Z#Marmitegate: what the tumbling pound means for our favourite products<figure><img src="https://images.theconversation.com/files/141636/original/image-20161013-31308-1v1xfog.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The end of an era?</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/davidchief/2995874035/in/photolist-5yJCYB-dhRyaK-Q9QGG-83o1NX-AKR7g-8GGoLy-dsRCZj-6UU9Ex-nsbSwk-9aoQb1-befdoK-CfQvo-5RQ5RJ-8HPGiR-9sXM7v-5JzYy-5RKFP8-8Wfqqz-2BrkM-57Ko3Z-5RWsA-BCUBU-vxxyY-7GAumR-4qSJMC-7W6p9B-cEsEhf-5RDFtH-2ikMWy-akf2td-4GD6sG-cdh9uQ-GEymm-94E1UE-7uDxY6-7uHx6J-7uDWTp-7uHM23-7uDJ3k-7uDU9B-7uHFFs-6Hsk95-7uDXvk-7uDXZk-6w8TcB-7uDAyM-7oTjkr-6VPZKW-7uDNNc-bEBfqT">David Martyn Hunt via flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>You either love it or hate it. This could apply to both Brexit and Marmite, two very British phenomena – but because of the former, you may soon be unable to get your hands on the latter, at least in some shops.</p>
<p>The decline in the value of the British currency since the referendum on Britain’s membership of the EU returned a result in favour of an exit has been <a href="https://www.ft.com/content/78478eee-e170-32d3-bdbb-b88a98f2f9bd">dramatic</a> and, some now begin to think, irreversible. While everyone has noticed the slide in the value of sterling in <a href="http://www.theweek.co.uk/brexit/70408/pound-worth-less-than-a-euro-at-airports">travel exchange shops</a>, its impact on daily life had not been fully appreciated until Britons picked up morning newspapers bearing <a href="https://www.ft.com/content/58560c1e-909a-11e6-8df8-d3778b55a923">headlines of doom</a>, threatening the disappearance of British staples such as <a href="http://metro.co.uk/2016/10/13/tesco-and-unilever-in-bitter-price-row-so-100s-of-items-are-missing-6189162/">Marmite</a> and <a href="http://www.independent.co.uk/news/business/news/tesco-marmite-unilever-brexit-pg-tips-price-row-shortage-plunging-pound-supermarkets-products-a7358676.html">Dove</a> soap from supermarket shelves. In the most notable case, <a href="http://www.bbc.co.uk/news/business-37639518">Tesco reportedly refused to agree to a price hike</a> demanded by Anglo-Dutch company Unilever, leading to a supply problem involving <a href="http://www.dailymail.co.uk/home/index.html">some Unilever products</a>.</p>
<p>What these headlines reveal is a very real legal problem that is about to hit British businesses and their counterparts around the world. Cross-border commercial contracts specify the currency in which payments are due to be made. What happens, however, when the value of the specified currency changes drastically and the amount to be paid no longer reflects the value of the goods to be supplied? </p>
<p>To return to the recent headlines, Unilever, the owner of Marmite, produces a number of products overseas which are then brought to sale in the UK. If it costs Unilever, for example, 0.20 euros to produce in France a bar of soap and deliver it to a British supermarket which buys it for 0.25 pounds, the recent drop in sterling presents the company with a big problem. </p>
<p>Before the referendum, one could exchange sterling for euro, getting perhaps 1.25 euros to the pound. Using the above hypothetical figures, this means that each bar of soap bought by the supermarket in early June 2016 would have given Unilever 0.31 euros, a profit of 11 cents on each bar. The same transaction with October 13’s price of 1.09 euros to the pound, however, means that Unilever would get 0.27 euros, a profit of just seven cents. </p>
<p>To maintain its profit margin, Unilever will want to raise the price at which it sells its goods to the supermarket – and <a href="https://www.theguardian.com/business/2016/oct/13/unilever-finance-director-graeme-pitkethly-defends-company-tesco-price-row-marmite">has defended its recent price hikes</a>. But the supermarket will not be pleased with this, as it will not want to pass on the burden to the consumer by raising prices on the shelf. Hence the <a href="http://www.dailymail.co.uk/news/article-3835034/Major-brands-axed-Tesco-shelves-row-supplier-Unilever-demanded-10-cent-price-rise-falling-pound.html">spat between Tesco and Unilever</a> – dubbed #Marmitegate – that threatens us with a temporary lack of common goods. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/141635/original/image-20161013-31336-1xmiw3w.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/141635/original/image-20161013-31336-1xmiw3w.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/141635/original/image-20161013-31336-1xmiw3w.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/141635/original/image-20161013-31336-1xmiw3w.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/141635/original/image-20161013-31336-1xmiw3w.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/141635/original/image-20161013-31336-1xmiw3w.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/141635/original/image-20161013-31336-1xmiw3w.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Will Brexit lead to empty supermarkets?</span>
<span class="attribution"><a class="source" href="http://www.shutterstock.com/dl2_lim.mhtml?src=f48w72D--T_yW-rbGYNzdQ-1-7&id=108585317&size=medium_jpg">Shutterstock</a></span>
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</figure>
<h2>Marmiteageddon?</h2>
<p>But is it legal to demand a price increase? A lot will depend on what the contract between the supplier and the retailer actually says. It is common to have price variation clauses in contacts that allow the supplier to raise prices if their manufacturing costs increase, or on the basis of other variables. </p>
<p>Think of your energy bills, for example. In the absence of a variation clause, or similar contractual mechanism, energy companies would face big losses if supply costs wildly fluctuated. Perhaps the most relevant historical precedent is the <a href="https://www.theguardian.com/environment/2011/mar/03/1970s-oil-price-shock">oil crisis</a> of the 1970s. The severe disruption caused by rapid increases in oil prices led to high inflation and turmoil in the currency markets. </p>
<p>Many businesses found themselves in the unhappy situation described above, seeing the real value of their foreign currency gains decrease. In the eyes of the law, an extreme alteration in exchange rates could be considered an external event (such as a natural disaster or fire that destroys goods about to be shipped) that prevents the performance of a contact, known as a “<a href="http://www.legislation.gov.uk/ukpga/Geo6/6-7/40/section/2">frustrating event</a>”. This, however, can only work when the contract itself does not make provision for the consequences of external shocks in what is commonly described as a <a href="http://uk.practicallaw.com/6-107-3808">force majeure clause</a>. Most contracts do apportion losses and costs of an extreme occurrence, offering lists of events that would qualify.</p>
<p>It is unlikely that the recent drop in sterling would qualify as a frustrating event that allows parties to suspend performance of their obligations. It is also unlikely to trigger force majeure clauses that would apportion losses according to pre-agreed principles. Before Brexit officially takes place, one could not even argue that any detrimental consequences are due to a change in law, triggering remedial provisions in most contracts.</p>
<p>What can a business do, therefore, when faced with dwindling profits? One could trigger termination clauses (if present) and once contracts are ended, renegotiate new ones with different pricing mechanisms. If the damage sustained by continued performance of the contact is too severe, one could even choose to breach the contract. Compensation for the victim of the breach is assessed on the basis of the loss they are actually suffering, not on how much money the perpetrator is saving. There may be some relief to those expecting payments of compensation for legal disputes already resolved. If a compensation award is denominated in sterling and the value of it has been significantly reduced, 1970s-era <a href="http://www.trans-lex.org/250100/">jurisprudence</a> suggests an increase of the amount payable may be possible.</p>
<p>But are you likely to see Marmite and your favourite bath products on the shelves again? Most certainly, yes. You are also most certain to find them to be more expensive. After all, someone will have to pay for the loss of profits and the lawyers’ fees.</p><img src="https://counter.theconversation.com/content/67007/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ioannis Glinavos does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Here’s what the law says.Ioannis Glinavos, Senior Lecturer in Law, University of WestminsterLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/665372016-10-05T15:41:51Z2016-10-05T15:41:51ZUK stock market shrugs off turbulent times as FTSE nears record high<figure><img src="https://images.theconversation.com/files/140488/original/image-20161005-14208-1ax3ytk.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C1000%2C661&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="http://www.shutterstock.com/pic-144027550/stock-photo-stock-market-graph-on-a-tablet-computer.html?src=qxP-PemYkO8cE6USIAKLdA-1-69">SGM/Shutterstock</a></span></figcaption></figure><p>The UK’s index of leading companies, the FTSE 100, has <a href="http://www.bbc.co.uk/news/business-37549685">broken the 7,000 points barrier</a> and is approaching all-time highs at what might look like a deeply fragile moment. Markets are placing higher and higher values on British firms, despite a protracted period of uncertainty after the Brexit vote, while economies worldwide face tough conditions with little help left from central banks. So why is it suddenly boom time for traders in London’s square mile? </p>
<p>At first glance, this may be look like a case of “animal spirits” – those erratic bursts of market behaviour identified by the economist <a href="http://www.pkarchive.org/economy/GeneralTheoryKeynesIntro.html">John Maynard Keynes in his 1936 book</a>. Perhaps more tellingly though, the phenomenon has run in tandem with a continuous downward trend of the exchange rate of the pound to the dollar. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/140479/original/image-20161005-14227-8ontme.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/140479/original/image-20161005-14227-8ontme.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/140479/original/image-20161005-14227-8ontme.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=446&fit=crop&dpr=1 600w, https://images.theconversation.com/files/140479/original/image-20161005-14227-8ontme.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=446&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/140479/original/image-20161005-14227-8ontme.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=446&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/140479/original/image-20161005-14227-8ontme.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=560&fit=crop&dpr=1 754w, https://images.theconversation.com/files/140479/original/image-20161005-14227-8ontme.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=560&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/140479/original/image-20161005-14227-8ontme.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=560&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">How many dollars to you get to the pound?</span>
<span class="attribution"><a class="source" href="http://www.xe.com/currencycharts/?from=GBP&to=USD&view=2Y">www.xe.com</a></span>
</figcaption>
</figure>
<p>This simple fact means that the seemingly odd behaviour of UK investors may not be so far-fetched. The declining value of the pound means that exports are cheaper than imports. In effect, the market strength is not so much an assessment of the UK economy as it is a bet on how well UK multinationals will do selling goods in foreign markets.</p>
<p>This call by investors kicked in after the Brexit vote on June 23 in response to an immediate drop in the value of the pound. Of course, currency fluctuations don’t dictate everything and underlying the confidence of investors is a belief that things will only get so bad. </p>
<h2>Calming Carney</h2>
<p>Before the Brexit vote, Bank of England governor Mark Carney gave a <a href="http://www.bbc.co.uk/news/business-35751919">grim forecast</a> on the uncertainty surrounding the UK’s economy post Brexit, and accurately predicted the drop in the value of the pound.</p>
<p>His sombre but reassuring approach did enough. Investors were given two prompts: a weak currency, but a firm hand on the tiller. This seems to have spurred their optimism that Carney would be able to set the appropriate monetary policy targets whatever the EU exit strategy and would be able to overcome any economic shocks as Britain prepares to secede from the European Union. It doesn’t mean they are right, of course, but sentiment is (almost) everything in markets.</p>
<p>The Bank of England’s role doesn’t end there. Since the Brexit vote, it has acted to drive down the cost of borrowing and increase spending and investment in the real economy. The UK three-month generic yield on Treasury bills has been going down. These are low-risk, short-term borrowing instruments so the drop should encourage short-term borrowers to invest in them. </p>
<p>From an investor’s point of view, low interest rates provide a low cost of borrowing. When companies take advantage of such a low rate, they can borrowing cheaply and use the borrowed capital to expand. </p>
<p>For households, the Bank of England’s strategy <a href="http://www.bankofengland.co.uk/boeapps/iadb/Repo.asp?Travel=NIxIRxRSx">acts as a disincentive</a> to put their money into savings and current accounts and should in theory encourage investments elsewhere. In other words, the only rational response for equity investors to the central bank’s initiatives is to “buy, buy, buy”. </p>
<h2>Bringing home the Bacon</h2>
<p>If there is a long-term prospect, it is this. The ten-year nominal yield for generic government bonds has been edging upwards. This is an indication that while short-term yield has decreased, encouraging investors to borrow and invest now, in the long-run, the rise in the long-term yields signify that, on average, short-term yields will go up in the future (thus the costs of borrowing). The message is: if you want to borrow and invest, do it now rather than later. </p>
<p>This likely reflects Carney’s optimism about the future of the UK’s economy in the long-run. Just like everyone else, markets don’t have enough information yet to know for sure, but the noises from the central bank and from the government are enough to underpin some measure of confidence for now. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/140486/original/image-20161005-14212-10k5qnq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/140486/original/image-20161005-14212-10k5qnq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/140486/original/image-20161005-14212-10k5qnq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/140486/original/image-20161005-14212-10k5qnq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/140486/original/image-20161005-14212-10k5qnq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/140486/original/image-20161005-14212-10k5qnq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/140486/original/image-20161005-14212-10k5qnq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/140486/original/image-20161005-14212-10k5qnq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">For Queen and country.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/59937401@N07/5474777324/in/photolist-9kMEyu-9LBtLk-3fgdwc-5Qpydi-7YHViU-d8XNJs-9NEYMC-9kP8co-9VDxpf-cBoVKd-9DSPrY-9DQ55F-9DSSfw-9NFk5w-9u4Ya4-9VC64W-b7oeNB-s1PDHa-8rpXCV-9kJFGX-dhug9N-in65Vo-3DTNUE-9VAmAB-a32o4Q-9Vy4xV-fwNBEY-dotR4Y-9EbvWM-6zQRUE-ibspRz-iT5t9q-6XwQj2-8PY4BV-cAEs9-pLf68i-4ixHor-e5d9M4-w3rTY-4HNeB7-8HcT89-PyrDr-qF3QNi-duGC8h-ds1B6b-98E2Eh-4Xt47T-4TwUQu-aRRcyD-eaSdUS">Images Money</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>As any UK historian will attest, Brexit is not a unique event in terms of its effect. Britain experienced a very similar episode in 1992-93 <a href="http://www.telegraph.co.uk/finance/2773265/Billionaire-who-broke-the-Bank-of-England.html">after the official German reunification</a> a couple of years earlier, when the pound slumped from more than US$2 to US$1.42. The FTSE, on the other hand, showed a similar response to today, moving from 1,990 points in 1990 to 3,689 in 1995.</p>
<p>So, is it erratic animal psychology or well-versed investor rationality? Probably a bit of both. If history is any indication, it is the case that when subjected to economic uncertainty and adversity, the British people and its central bank will tend to work together to achieve economic prosperity. As Francis Bacon once said, “<em>scientia potestas est</em>” – knowledge is power. It is perhaps better translated as: “he who possesses (new and logical) information possesses the power to act on it”. We may not have much information right now, and little of it certain, but investors will act on what they can get.</p><img src="https://counter.theconversation.com/content/66537/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Handy Tan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The UK’s leading index of companies has broken the 7,000 points barrier despite fragile growth and the uncertainty of Brexit.Handy Tan, Senior Lecturer in Banking and Finance, Anglia Ruskin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/618722016-07-04T11:31:46Z2016-07-04T11:31:46ZExplainer: what a weaker pound means for the British economy<figure><img src="https://images.theconversation.com/files/129193/original/image-20160704-19091-1hqkjw5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Fallen.</span> <span class="attribution"><span class="source">shutterstock.com</span></span></figcaption></figure><p>The value of the pound dropped off a small cliff when it became clear that Britain had voted to leave the European Union. But this is not necessarily a bad thing. Simple economics dictates that a falling currency is good for exports – so in theory the fall could be beneficial for the UK economy.</p>
<p>But currency movements in either direction have consequences. If a currency is too weak, then you have an oversupply of money and fast inflationary growth, while if it is too strong you have an undersupply and slow but steady growth. </p>
<p>An oversupply of money reduces the value of a currency and leads to an inflated economy as interest rates are too low and the money is cheap and abundant. This <a href="http://tinyurl.com/hs4gh5s">happened in Greece</a> with the euro before the financial crisis when an oversupply of money led to an unstable, inflationary economy. </p>
<p>With an undersupply of money the economy stagnates, as interest rates are too high, the value of a currency increases and money is therefore expensive. This is what happened in the UK <a href="http://www2.warwick.ac.uk/fac/soc/pais/people/kettell/research/erm.pdf">during its time in the European Exchange Rate Mechanism</a> (1990 to 1992) and also Greece after 2008 as the euro switched from being too cheap for the country to too expensive.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/129187/original/image-20160704-19103-1t27wrs.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/129187/original/image-20160704-19103-1t27wrs.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=445&fit=crop&dpr=1 600w, https://images.theconversation.com/files/129187/original/image-20160704-19103-1t27wrs.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=445&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/129187/original/image-20160704-19103-1t27wrs.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=445&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/129187/original/image-20160704-19103-1t27wrs.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=560&fit=crop&dpr=1 754w, https://images.theconversation.com/files/129187/original/image-20160704-19103-1t27wrs.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=560&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/129187/original/image-20160704-19103-1t27wrs.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=560&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Brexit’s effect on the pound.</span>
<span class="attribution"><a class="source" href="http://www.xe.com/currencycharts/?from=GBP&to=USD&view=1W">xe.com</a></span>
</figcaption>
</figure>
<p>So the answer to whether or not a fall in your currency is a good thing depends on how and where you spend it, as well as the relationship between your country’s economic activity and the outside world. The claim that a weakened currency makes exports cheaper is true, but this is a short-term gain that comes with a proviso: what about the imports that those exports rely on, such as raw materials? </p>
<p>An estimated 50% of UK exports <a href="http://www2.warwick.ac.uk/newsandevents/features/eureferendum/">rely on imported components</a>. These will become more expensive as the pound falls. So the gains made from a growth in exports will be limited.</p>
<p>A weaker currency can have more negative effects, too. It is often associated with low productivity growth and inflation due to an increase in the demand for retail goods and services. Take China’s currency: the renminbi <a href="https://www2.uni-hamburg.de/fachbereiche-einrichtungen/fb03/iwwt/makro/just.pdf">is systematically undervalued</a> to keep its exports competitive, but the country has a problem of low productivity because its products remain cheap without the need for investment in production.</p>
<h2>Finance crunch</h2>
<p>The main issue for the UK, however, is that one of its biggest industries will suffer from the hit to the pound – financial services. Financial services contributed 14.5% towards British GDP in 2014, as opposed to 11% for manufacturing and 7% for construction. Plus, finance is part of an overall service sector that forms 80% of UK GDP. The country’s finance industry is likely to suffer because it is built on foreign investment that puts its faith in a strong pound. </p>
<p>This includes investment in stocks and other financial instruments, government debt and activities such as property investment in London or regional centres such as Manchester. A weak pound will eat into these profits. For example, house prices in London <a href="http://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/housepriceindex/april2016">rose by 10.8% in 2015</a> and yet the pound has <a href="http://www.bankofengland.co.uk/boeapps/iadb/Rates.asp">fallen by around 12%</a> – so an overseas investor that purchased a London property during the past 12 months effectively had their profits wiped out this week. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/129192/original/image-20160704-19127-g21hc1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/129192/original/image-20160704-19127-g21hc1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=386&fit=crop&dpr=1 600w, https://images.theconversation.com/files/129192/original/image-20160704-19127-g21hc1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=386&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/129192/original/image-20160704-19127-g21hc1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=386&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/129192/original/image-20160704-19127-g21hc1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=484&fit=crop&dpr=1 754w, https://images.theconversation.com/files/129192/original/image-20160704-19127-g21hc1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=484&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/129192/original/image-20160704-19127-g21hc1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=484&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Exports won’t offset losses to the finance industry.</span>
<span class="attribution"><span class="source">Martin Charles Hatch / Shutterstock.com</span></span>
</figcaption>
</figure>
<p>And even without major losses this will have an effect on demand. A fall in buyers will lead to lower prices and if investors offload properties to recoup at least some money then prices will fall further. </p>
<p>This is a good thing for those priced out of buying a London home by Russian and Chinese plutocrats inflating the London property market as prices in the capital will fall. One of Singapore’s largest lenders has suspended its loan programme for London properties, for example, following the 10% rise in its currency against the pound. But if you work in finance or construction there is less reason to celebrate, as the fall in the pound could lead to job losses in these sectors.</p>
<p>In short, whether a fall in the value of a currency is good or bad depends on imports and exports, and the type of economy a country has. As the UK’s economy is centred on an influx of money to invest in its finance industry – which requires a strong currency to produce returns – it will feel the crunch. Claims that the fall in the pound are good for exports fail to take this into account.</p><img src="https://counter.theconversation.com/content/61872/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Duncan Connors does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A weak pound might be good for exports but it is bad news for the investment that the economy is based on.Duncan Connors, Teaching Fellow in Finance and Economics, Durham UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/232082014-02-13T14:46:52Z2014-02-13T14:46:52ZScots firms fret over uncertainty they would face without the pound, study indicates<figure><img src="https://images.theconversation.com/files/41473/original/982wnhpd-1392297866.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Currency question crucial for Scottish business sector.</span> <span class="attribution"><span class="source">Andrew Milligan/PA </span></span></figcaption></figure><p>The announcement by the Chancellor, George Osborne, that there <a href="http://www.bbc.co.uk/news/uk-scotland-scotland-politics-26166794">would not be monetary union</a> between an independent Scotland and the rump UK is a game changer. </p>
<p>It comes one day after researchers, including myself, working on a major project on the <a href="http://www.esrc.ac.uk/research/major-investments/future-of-uk-and-scotland/">Future of the United Kingdom and Scotland</a> gave a briefing in Brussels on our findings so far. In it David Bell, of Stirling University, and I argued that the major uncertainties facing business are the EU, corporate taxation, income taxation and especially the currency.</p>
<p>In my own research, I have so far conducted 52 in-depth interviews with business leaders in medium and large firms across a variety of sectors. In a clear majority of these interviews, business leaders have indicated that it is uncertainty around the currency that poses the most significant risk for their businesses. Clearly, they are right to worry about the implications of Osborne’s announcement, and to wonder what this will actually mean in practice.</p>
<h2>Go it alone</h2>
<p>Under EU rules, for a country to join the euro, it must first demonstrate that it can run its own currency and central bank within the deficit and debt restrictions placed on it by the EU before it can join the European monetary union. In other words, the Euro in the short-term is not an option for Scotland.</p>
<p>Consequently, an independent Scotland would have to have its own currency. Its value would either be pegged to the pound or allowed to float freely on the international markets, which almost certainly would mean a devalued and more volatile currency. There is also the possibility that there could be some form of informal currency union, or “sterlingization”, which may have some attractions for business, but would still bring numerous challenges.</p>
<p>If the pound was unavailable to a post-independent Scotland, many businesses would have to make tough decisions on whether they could continue to base themselves in the country and the degree to which they maintained the same level of economic activity. Why? Because for a significant number of medium and large businesses in Scotland, most of their trade in the UK, often as much as 90%, is in the rump UK (rUK) rather than Scotland. This makes sense when you consider that the population of Scotland is 5m, but the population of the rUK is 58m.</p>
<p>Firms would, therefore, have to consider very carefully a range of different factors driving their businesses, but primary among them would be three things: how separate currency jurisdictions would impact on their ability to sell products and services to their customers; whether it makes recruitment and retention of high-value, skilled labour more or less difficult; and whether it creates or destroys shareholder value by decreasing or increasing costs and profitability. Global businesses whose customer base is also primarily global, however, might be less impacted.</p>
<p>Small firms in Scotland would not be immune to the implications of having separate currencies in Scotland and the rUK either. Firms that do any trading in the rUK would have to deal in two currencies, and there would be costs and time involved in exchanging, translating different prices from one currency to another and so on. The existence of a border can reduce trade, and some of these “transaction” costs associated with dealing in different currencies and jurisdictions help to explain why.</p>
<p>Economic fundamentals suggest that for countries to share a currency there needs to be agreement over deficits, debts and taxation. This may not be sustainable across two economies driven by different factors – and a Scottish resource-led economy would differ from rUK. This at the very least necessitates close co-ordination, if not integration. The euro crisis of recent years <a href="https://theconversation.com/nobel-laureate-tough-choices-for-a-troubled-euro-21449">is evidence of this</a>.</p>
<p>So, far from being an act of bullying or intimidation, as Nicola Sturgeon suggests, George Osborne’s announcement is underpinned by what is increasingly becoming a position supported by economic orthodoxy. That’s not to say that if the political will exists for a monetary union one couldn’t be made to work, for a time. But there are few examples, if any, where one has been made to work over extended periods of time without political integration.</p>
<p>Ethical considerations aside, if the Scottish government was to use this as an excuse to walk away from its share of the UK debt, the reaction from international markets would almost certainly be swift and brutal, and result in a poor credit rating for Scotland. This could then translate into uncertainty and volatility within the Scottish economy, which would in turn most likely reduce business investment, economic growth and jobs. </p>
<p>The UK government’s position on currency will undoubtedly be unwelcome news for the Scottish government. However, it would be wise to recalculate what this means for the independence project and, more importantly, for average Scots, and to build their case for independence from there.</p>
<p>So while the <a href="http://www.scotland.gov.uk/Publications/2013/11/9348/0">stated position</a> of the Scottish government is to continue to use the pound sterling, some uncertainty has existed around whether the UK government would agree to such a pledge. The governor of the Bank of England, Mark Carney’s <a href="http://www.bankofengland.co.uk/publications/Pages/speeches/2014/706.aspx">recent speech</a> in Edinburgh, outlined the economic difficulties of monetary union without political union. The pressure is now on the Scottish government to outline its plan B, whatever that may be. But even with a plan B, adopting a separate currency in a post-independent Scotland, our <a href="http://www.futureukandscotland.ac.uk/about/people/brad-mackay">research suggests</a>, would likely to be problematic for a significant number of Scotland’s small, medium and large businesses.</p>
<p>The implications are that independence may well result in a drop of economic output, at least in the short and medium term. Cross-border trade would be diminished, and some medium and large businesses (who are responsible for most of Scotland’s jobs and national income), would choose to reduce their exposure to the country by migrating some of their activities to either the rUK or the EU. In the long-term, of course, anything is possible.</p>
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<p><em>This article was first published on the ESRC’s <a href="http://www.futureukandscotland.ac.uk/blog/currency-reflections-business-views">Future of the UK and Scotland</a> website.</em></p><img src="https://counter.theconversation.com/content/23208/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Brad MacKay receives funding from the ESRC for the Future of the UK and Scotland.</span></em></p>The announcement by the Chancellor, George Osborne, that there would not be monetary union between an independent Scotland and the rump UK is a game changer. It comes one day after researchers, including…Brad MacKay, Professor in Strategic Management , The University of EdinburghLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/232092014-02-13T14:46:42Z2014-02-13T14:46:42Z‘No’ to currency union – but that might not change many Scottish minds about independence<figure><img src="https://images.theconversation.com/files/41472/original/dmk54thz-1392294283.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Who gets the money – and the debt?</span> <span class="attribution"><span class="source">Scott Heppell/PA Wire</span></span></figcaption></figure><p>Currency unions between independent states are technically difficult to establish and run. They can require strict limits to fiscal autonomy, and they can need painful adjustments if the component economies move out of synch. But whether or not they are set up and last has less to do with economics than with political will. </p>
<p>Seen from an economic perspective the Eurozone is hugely problematic. Its economies are much more out of synch than Scotland’s is with that of the rest of the UK. Yet it endures because the political will is there for it to do so, both in the governments of the strongest members such as Germany and the weakest like Greece.</p>
<p>George Osborne’s <a href="http://www.bbc.co.uk/news/uk-scotland-scotland-politics-26166794">speech in Edinburgh</a> (and the contributions expected from Ed Balls for Labour and Danny Alexander for the Lib Dems) are statements that the current and possible future governing parties of the UK do not have the political will to enter into a currency union with Scotland. Though lots of Osborne’s justification is couched in the language of economics, his speech is all about hardball politics.</p>
<p>It is an attempt to blow a hole in the Scottish government’s vision for many aspects of independence – not just the economic ones – as a continuing partnership between two independent states using many of the same institutions, such as the Bank of England, which currently provide services for the UK as a single state. It feels without doubt like a game-changing moment in this long independence debate.</p>
<p>But the impact on the game is nuanced and unpredictable. The Scottish government and the Yes Scotland campaign have been performing a balancing act in recent months. Part of their offer has been the reassurance of continuity around the pound and many other matters; on those matters their assessment is, in effect, that Scotland is – to borrow a phrase – better together with the rest of the UK. </p>
<p>Yet in other areas the Yes camp has been sharpening a message of difference and distinctiveness: on welfare, on childcare and gender equality, on immigration. Here we see a dividing-line strategy which says we are not, on these matters, better together. There is a mixed message here, and perhaps Osborne’s statement will push the Yes camp further or more consistently into stressing the distinctiveness of values and policy that independence might bring.</p>
<p>What the UK government and the Better Together campaign will get from Osborne’s statement is not fully clear. As Brad Mackay suggests elsewhere Osborne may well feed and deepen the nervousness that Scottish businesses have about currency issues and the transaction costs involved in not being part of a sterling zone. But as <a href="http://www.futureukandscotland.ac.uk/blog/pound-or-euro-its-not-what-scottish-voters-are-talking-about">John Curtice</a> suggests, ruling out a sterling currency union may have surprisingly little traction on public opinion. </p>
<p>Many, it seems, have already discounted the prospect of currency union, expect other arrangements to follow a Yes vote anyway, and don’t see currency uncertainty as anything that much changes their broader assessments of whether or not independence would be a good thing for them economically.</p>
<p>Some of the other commentary now unleashed by Osborne’s Edinburgh speech points to possible unintended consequences of so clearly rejecting the Scottish Government’s vision of currency union. <a href="http://www.heraldscotland.com/comment/columnists/osbornes-politics-of-dirty-harry-on-currency-union.23407532">Iain MacWhirter</a> and Magnus Linklater both hint at a backlash: the Scots don’t like to be lectured by those from “down south”, especially by Conservatives (expect the adjective “posh” to be added) and especially by the prime architect of the austerity and welfare policies the Scottish Government is trying to draw its dividing lines around. The quick <a href="http://www.dailyrecord.co.uk/news/politics/independence-referendum-nicola-sturgeon-accuses-3137607">recourse by Nicola Sturgeon</a> to the language of Scotland being bullied by an unreasonable and much stronger rest of the UK suggests the Yes camp will be quick to nurture such a backlash.</p>
<h2>What’s next?</h2>
<p>On the one hand we can expect a new level of bitterness in the debate. The tit-for-tat of responding to the rejection of currency union with a <a href="http://www.telegraph.co.uk/news/uknews/scotland/scottish-politics/10634697/Scottish-independence-SNP-retribution-plan-over-pound-would-cripple-economy.html">refusal to share the cost of UK debt</a> is one example. </p>
<p>Much of this may be posturing and pre-negotiation. But it could have a lasting impact and impede constructive engagement on working out Scotland’s relationship with the rest of the UK whatever the result of the referendum. It will likely not impress voters. And it will also not impress the financial markets and international institutions that could penalise not just Scotland but also the rest of the UK should that bitterness get out of hand.</p>
<p>On the other hand we can expect a rush of thinking about the elusive Plan B. If formal currency is indeed ruled out, what are Scotland’s options? The euro is not one of them in the short term as Scotland would not meet the <a href="http://www.telegraph.co.uk/news/politics/10418890/Independent-Scotland-would-have-to-accept-the-EU-template.html">conditions for joining the Eurozone</a> by the anticipated “independence day” in March 2016. </p>
<p>So it is either a distinct Scottish currency with all the associated set up and transaction costs, or an informal currency union in which Scotland continues to use the pound, but where the Scottish government has no role in the governance arrangements for monetary policy and no access to the backstop arrangements the Bank of England provides as lender of last resort for the wider financial system. As <a href="http://www.futureukandscotland.ac.uk/papers/scotland%E2%80%99s-currency-options">Angus Armstrong</a> has shown these are possibilities with advantages and disadvantages. Perhaps we will now see the attention given to them that they really should have had all along?</p>
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<p><em>This article was first posted on ESRC blog <a href="http://www.futureukandscotland.ac.uk/blog/currency-reflections-big-picture">The Future of the UK and Scotland</a></em></p><img src="https://counter.theconversation.com/content/23209/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Charlie Jeffery receives funding from the ESRC for The Future of the UK and Scotland.</span></em></p>Currency unions between independent states are technically difficult to establish and run. They can require strict limits to fiscal autonomy, and they can need painful adjustments if the component economies…Charlie Jeffery, Professor of Politics, The University of EdinburghLicensed as Creative Commons – attribution, no derivatives.