Is the pound’s fall a sign of a return to the economic turmoil of the 1980s?

Does the recent collapse of the pound sterling, which fell to an all-time low against the dollar on Monday, mean the UK is as bad as it was in the 1970s or 1980s when the British currency hit its previous low?

The current economic context is similar to that of those decades, when the United Kingdom was dubbed “the sick man of Europe”, but the current ills of the British economy are different, and the situation is not unique to this country.

During the 1970s, a period of energy shock like the current one, the British Labor government chose to support the economy with public spending, which caused the currency to fall, inflation to rise and public finances to deteriorate.

London then had to turn to the IMF (International Monetary Fund).

Furthermore, now inflation has also skyrocketed to almost 10% – although still far from the 20% of 1975 – interest rates are rising, recession is knocking at the door and public accounts are deteriorating due to the massive program of aid to the accounts. of energy launched by the new Conservative government of Liz Truss.

Markets were taken by surprise by the combination of massive government bailouts and sweeping tax cuts announced by Finance Minister Kwasi Kwarteng on Friday.

This combination is considered reckless and risky, especially as its funding remains uncertain and has had a repulsive effect on the markets.

minimal renovations

In the 1980s, Conservative Prime Minister Margaret Thatcher’s austerity policy and major tax cuts were accompanied by drastic reductions in public spending and deregulation.

But while the tax cuts announced by the Truss administration “are similar in scale” to those of Thatcher’s early years, “the reforms are much smaller,” says Paul Dales, a British expert at Capital Economics.

“Compared with privatization, the reduction of union power and the acceptance of the single market in the 1980s, priority areas of investment and changes in the criteria of social benefits are of little importance”, he says.

After years of lean cows, between the competitive shock resulting from the entry into the European Economic Community (EEC) in 1973 and the Thatcher-era reforms, “the British market became much more competitive” and the economy was reactivated, explains to AFP Jane Foley, an analyst at Rabobank.

Instead, now “Brexit, the next recession and soaring inflation leave a bitter taste in investors’ mouths,” he adds.

Nevertheless, limiting the energy bill will have a calming effect on inflation in the short term. And unlike the 1970s, unemployment is down and even the UK is facing labor shortages as a result of the pandemic and Brexit.

Furthermore, the British situation is not isolated from that of other European countries, which are also facing an energy crisis, deteriorating public finances and rising interest rates.