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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Britain to Give up the Pound and Join the Euro?

Currencies / British Pound Dec 01, 2008 - 04:17 AM GMT

By: Nadeem_Walayat

Currencies Best Financial Markets Analysis ArticleIt seems that every few weeks more panic measures are announced by the UK government as it is forced to take drastic action in the face of a collapsing financial system and economy slumping fast into recession. First came Septembers ban on short selling of banking stocks, followed by the £500 billion budget busting bank rescue in October, then the panic interest rate cuts, and most recently the emergency VAT cutting budget, now speculation is growing as discussions are leaked that Britain is moving towards joining the Euro as alluded to by the European Commission President Jose Manuel Barroso whilst speaking on French TV and radio Sunday:


"I'm not going to break the confidentiality of certain conversations, but some British politicians have already told me, 'If we had the euro, we would have been better off',"

"I don't mean to say that it will be tomorrow and I know that the majority in Britain are still opposed, but there is a period of consideration under way and the people who matter in Britain are currently thinking about it"

As my recent series of analysis articles have highlighted that Britain is on the fast track path towards bankruptcy that will see real liabilities eclipse £3.2 trillion by the end of 2010. However I concluded on a number of initiatives that could help Britain avoid bankruptcy that is associated with a currency collapse which includes joining the Euro: Bankrupt Britain Trending Towards Hyper-Inflation?

Join the Euro - The last resort for Britain is for monetary union with Europe. The benefit will be that the falling currency problem related to the issue of debt and underwriting of the banking system is diluted as the currency then has far, far more reserves backing it then that for the British Pound alone would be left to suffer a currency collapse. This is effectively what the Irish did when they guaranteed all bank deposits at 100%, for if they had been outside of the Euro then they would have been on the fast track to where Iceland is today as no way could Ireland meet such as liability.

Sterling over the past 12 months has literally fallen off the edge of the cliff, having plunged by more than 20% against most major currencies and by 30% against the resurgent U.S. Dollar that follows its own bullish trend despite the crescendo of views of an imminent collapse that is not going to transpire as my analysis of the past six months has highlighted. U.S. Dollar Bull Market Update

The targets for sterling as illustrated in previous analysis still stand in that the British Pound is projecting down towards the £/$137.50 multi decade support level which may give temporary respite to the sterling bear market. However a break below £/$137.50 would target parity to the US Dollar, which will mean a further loss of value of 35% in the value of all assets and 53% loss of value for the duration of the bear market to parity and likewise a large rise in the price of dollar imported commodities, goods and services and to a lesser degree from other countries, therefore highly inflationary.

Will Britain Join the Euro?

Joining the euro is political dynamite for any party that would consider taking the momentous decision as the majority of the British public would under any circumstances be AGAINST the decision to do so. Therefore the only time a British government would actually contemplate joining the Euro would be in the face of an economic catastrophe, i.e. it would literally be the last throw of the dice in the face of impending bankruptcy and associated currency collapse and in that respect we are still some way off from that day. Still the risks of bankruptcy are real given the way official £600 billion of public sector net debt could rise to liabilities of more than £8 trillion as a consequence nationalising the whole banking system and several more years of ballooning deficit spending as the below graph illustrates.

In the event of such scale of liabilities the currency would collapse as Britain would not be able to service the debt denominated in foreign currencies which would make the country bankrupt i.e. where Iceland is today. Off course between now and the hyperinflationary doomsday scenario there would be a point in which the decision could be taken to join the euro in advance of the nationalisation of the banking system, even though that would make a mockery of the EU competition rules as even today the French are attempting to break EU competition rules by their intention to loan 11 billion euros to French banks.

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More recent analysis of Britain's Path Towards Bankruptcy

By Nadeem Walayat
http://www.marketoracle.co.uk

Copyright © 2005-08 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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