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Boris Johnson and the pound vigilantes

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Boris Johnson’s foreign exchange market challenge today has to remind one of that faced by Francois Mitterrand in the early 1980s. However, unlike Mitterrand, it is far from clear that Mr. Johnson will be in a political position to successfully make the policy U-turn needed to save his premiership.

In 1981, Francois Mitterrand won the French presidency on a socialist platform that included the nationalization of France’s banks. Eighteen months later in 1983, having been chastised by a plummeting French franc, Mr. Mitterrand was forced to make his famous policy U-turn, which involved embracing a conservative budget austerity policy and dropping his nationalization program.

Today, it seems that Mr. Johnson, the UK’s new prime minister, is facing a similar baptism of fire from the currency market. Responding to Mr. Johnson’s repeated assertions that the UK will definitely leave the European Union on October 31 with or without a Brexit deal, the pound appears to have gone into a freefall.

In the space of a week, sterling has now lost some 3% of its value and is now trading at its weakest level in the past two and a half years. It is doing so on market fears that a hard Brexit will involve the disruption of the UK’s supply chains and will seriously limit the UK’s easy access to the European Single Market. It is also doing so at a time that the UK is overly dependent on the kindness of strangers to finance its gaping external current account deficit.

In order to limit further damage to the UK economy from a plummeting currency, it would seem that Mr. Johnson will have to assuage the market’s fears by back pedaling on his hardline Brexit position. However, it is far from clear that he is in a political position to do so.

Not only has Mr. Johnson boxed himself in by his strident uncompromising Brexit statements and by stacking his cabinet with hardline Brexiteers. He has also got Nigel Farage and his Brexit Party breathing down his neck threatening to destroy the Conservative Party limb by limb should Mr. Johnson in any way soften his hard-Brexit policy stance. Judging by the Brexit Party’s decimation of the Conservative Party at the recent European Parliamentary election, Mr. Johnson will be forced to take Mr. Farage’s threats seriously.

All of this heightens the odds that the currency market vigilantes will force the UK to early elections well before the October 31 deadline. It also suggests that world economic policymakers should brace themselves for considerable global financial market turbulence stemming from a continued sterling freefall.

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