David Cameron frowning Ben Stevens/ I-images via Zuma Wire

Will Brexit Break the Pound?

The British government's recent announcement that a referendum on the UK’s EU membership will be held on June 23 was quickly followed by a sharp decline in the value of the pound. The risk is that such volatility – and the accompanying political instability – could drive British voters to reject the EU.

PRINCETON – The British government’s recent announcement that a referendum on Britain’s European Union membership will be held on June 23 was quickly followed by a sharp drop in the pound’s value. Exchange rate volatility for the pound is bound to continue until the referendum, and to intensify at moments when a vote for “Brexit” looks more likely. The result may be a self-fulfilling prophecy, in which market and political instability drive British voters to reject the EU – an outcome that would be highly dangerous for them and their European counterparts alike.

The political implications recall the experience of the twentieth century, when the pound’s external value was a national obsession in the UK and currency crises regularly destroyed the credibility of governments and wreaked political havoc. For example, in August 1931 – the middle of the Great Depression – a financial crisis and a run on the pound forced the resignation of the Labour government, led by Prime Minister Ramsay MacDonald; it was replaced by a coalition government, and the Labour Party split apart.

In 1967, another Labour government, led by Harold Wilson, was damaged by a devaluation spurred by a speculative attack; Labour lost the subsequent general election. The party regained power in 1974, but within two years Britain was hit by another currency crisis – this one large enough to require support from the International Monetary Fund. Again, Labour lost the next election and the party split.

To continue reading, please log in or enter your email address.

To access our archive, please log in or register now and read two articles from our archive every month for free. For unlimited access to our archive, as well as to the unrivaled analysis of PS On Point, subscribe now.

required

By proceeding, you agree to our Terms of Service and Privacy Policy, which describes the personal data we collect and how we use it.

Log in

http://prosyn.org/rczUw6p;

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated cookie policy and privacy policy.