The Pound in Crisis

A couple of years ago, the British Pound seemed resilient against the Euro and Dollar and at one point was the value of two dollars. Now the pound is nearly one to one with the Euro. According to the Economist, this fall in value is linked to:

"plans by Prudential, a British insurance firm, to purchase the Asian operations of AIG, an American insurance giant, at a cost of $35 billion. But the main reason for sterling’s sudden plunge was political. The markets now fear that Britain’s general election, due by June 3rd at the latest, will not see a strong Conservative government elected with an effective mandate to sort out the public finances—or indeed any clear result. That loss of confidence is sapping sterling".

However, Great Britain still did have a few bright spots including a lower public debt than other large economy countries, the longevity of it's "gilts", meaning that their government would have to pay much less of its debt than other countries as well. Furthermore, Britain's government structure allows for decisive results, which allows for the newly elected government to produce "a credible plan to put the public finances on to a sustainable path".

However, the party that ends up in power will have to deal with a huge deficit and as discussed in class, perhaps a lower pound will allow for Britain to export more to grow out of it's debt. This still will have an impact on other European countries as well, because the U.K. is part of the European Union although they do not share the same currency. The drop in the Pound is somewhat suprising though because it is known for being stable, even when it is volatile as it was between mid-2007 and the end of 2008 when it fell in value about 30%

"after which it picked up a bit and then stabilized". However, the lack of value in the Pound could bring in a new government who has a different economic policy than it's trading partners. This would change the economic ability of Britain, as well as it's influence in the world. As we discussed in class, the Euro-zone is experiencing currency problems as well. Is this good or bad for the world in terms of trading, or should the world be wary if a huge economic centers experience currency instability?

How would a change in government in Britain influence the trade and military relations with the United States? Would this become similar to the Dutch, who are pulling out of Afghanistan making the United States compensate for it by sending more troops to the war? How does the the lower value of the Pound influence international trade? Should the U.S. or Europe be worried about cheaper British goods entering the market? How do you think Britain will get out of there economic slump?