The pound is regarded as an international currency. However, the financial crisis has caused the value of the pound to fall, reaching a four-month low against the euro in September. This recent weakening of sterling is partly the result of worries that the Lloyds Banking Group will find it difficult to meet the ‘strict criteria to leave the government’s insurance scheme for toxic banking assets’ set for it by the Financial Services Authority.
However, one of the main reasons relates to recently published figures showing UK debt (see for data). The UK’s public-sector net borrowing has now reached £16.1bn and the government’s overall debt now stands at £804.8bn: 57.5% of GDP. This represents an increase of £172bn in the past year. Over the longer term, this is unsustainable. The government could find it increasingly difficult to service this debt. This would mean that higher interest rates would have to be offered to attract people to lend to the government (e.g. through bonds and bills), but this, in turn, would further increase the cost of servicing the debt. Worries about the potential unsustainability of UK govenrment debt have weakened the pound.
But isn’t a lower exchange rate a good thing in times of recession as it gives UK-based companies a competitive advantage over companies abroad? The following articles consider UK debt and the exchange rate.
Pound plumbs five-month euro low BBC News (21/9/09)
Market data Telegraph (22/9/09)
Pound slides back against dollar and euro Guardian (21/9/09)
Pound drops as UK stocks fall for first time in seven days Bloomberg (21/9/09)
Public sector borrowing soaring BBC News (18/9/09)
Govt spending cuts ‘could help pound’ Just the Flight (21/9/09)
Pound dips to four month euro low BBC News (18/9/09)
Weak pound hits eurozone holidaymakers Compare and save (21/9/09)
Questions
- What is the relationship between public debt and the value of the pound? How do interest rates play a part?
- What is quantitative easing and has it been effective? How does it affect the exchange rate?
- What are the advantages and disadvantages of a freely floating exchange rate relative to a fixed exchange rate?
- If the UK had joined the euro, do you think the country would have fared better during the recession? Consider public debt levels: would they have been restricted? What would have happened to interest rates? What would have happened to the rate of recovery
For some time now, education has been a top priority for the government. They have been tackling standards in schools and have a target of a 50% participation rate in higher education. Most people agree that school education should be free, but opinion is divided when it comes to higher education. Is the return to the individual greater than that to society or vice versa? Is it the same for all degrees? This is one of the questions that affects funding. Should the individual pay? Or the government? Or should there be a mixture of funding?
The question of university education has become even more of an issue in the current recession, with many seeing a university education as a way of avoiding, what could be, inevitable unemployment. With this increase in demand, there is increasing pressure on the funding: it is simply not fiscally feasible to fund everyone’s university education. As such, business leaders have advised a rise in tuition fees. Students could be charged thousands more and made to face a higher interest rate on any loans. This highly contentious issue is considered in the articles below.
Charge students more, say bosses BBC News (21/9/09)
Middle class university students ‘should pay more’ Telegraph (21/9/09)
Elite universities plan to cut UK student numbers amid funding drop Telegraph (20/9/09)
Fee rise must aid poor students BBC News (27/7/09)
Loans delay for 150,000 students continues Daily Mail (19/9/09)
‘No fee degrees’ university plan BBC News (8/7/09)
‘New market’ in education (podcast) BBC Today Programme (8/7/09)
Bring back tuition fees for middle class students Scotsman (11/9/09)
CBI advises raising university fees to £5,000 a year to tackle funding crisis Guardian (21/9/09)
University ‘way out of recession’ BBC News (8/9/09)
Schools secretary Ed Balls under fire over education cuts Mirror (21/9/09)
Students should pay more – CBI (video) BBC News (21/9/09)
Questions
- Why is education described as a merit good? Explain the characteristics and why it constitutes a market failure.
- Identify any externalities involved in higher education. Do they imply that the free market would led to a level of higher education that is above or below the social optimum?
- List the costs to society of a university education. (Think about opportunity cost).
- What are the arguments for (a) only the individual funding their university education (b) the government funding university education (c) a combination of both?
- Is it a reasonable policy to increase university fees? If so, should students receive loans to cover this increase? If not, what do you think is an alternative option to help this funding crisis?
All nations are interdependent and few have escaped the recent economic turmoil that began with the collapse of the sub-prime mortgage market in America. Businesses have gone under; interest rates have been cut and then cut again; profits have fallen; unemployment has risen and expectations have remained gloomy.
But, what’s the latest? How is the British economy faring and what about the rest of the world? Some sources suggest that we are already in a recovery, whereas others suggest that the current downturn is not yet over. House prices recovered somewhat in July, but various sources suggest that they experienced their biggest fall in August. The following articles look at recent economic developments.
Job cuts at Vauxhall likely as GM agrees sale to Magna Telegraph (10/9/09)
A look at Economic developments around the globe The Associated Press (10/9/09)
BoE holds QE at 175 bln stg, rates at 0.5 pct Reuters (10/9/09)
Kesa’s UK recovery hit by European slowdown Times Online (10/9/09)
Top US banker criticises bonuses BBC News (9/9/09)
Austrian GDP contraction slowed in Q2 Reuters (10/9/09)
Europe and America’s economies to beat UK, OECD says Telegraph (4/9/09)
Britain will be behind rest of world in emerging from recession Times Online (3/9/09)
Bank of England holds rates at 0.5pc and QE at £175 bn The Telegraph (10/9/09)
Questions
- Do you think the evidence suggests that the outlook for the global economy is improving?
- Why will Britain probably take longer to recover from the recession than other major economies?
- What is the theory behind low interest rates helping the economic recovery?
- Which policies have the UK and other governments used to tackle this economic downturn? Would any others have been more successful?
- In what ways and for what reasons are countries economically interdependent?
On the eve of the September 5/6 G20 meeting of Finance Ministers in London, the OECD published an interim forecast of the macroeconomic and financial performance of the G7 economies. According to the OECD, “Recovery from the global recession is likely to arrive earlier than had been expected a few months ago but the pace of activity will remain weak well into next year.” So is it time to start reversing the various fiscal and monetary stimuli adopted around the world? Or should governments and central banks continue to stimulate aggregate demand in order to maintain the fragile recovery? The following news releases, speeches and articles look at answers given to these questions by various countries and international institutions.
Recovery arriving quicker than expected but activity will remain weak, says OECD OECD News release (3/9/09)
What is the economic outlook for OECD countries? An interim assessment OECD Economic Outlook, Interim Assessment (3/9/09)
IMF Managing Director Dominique Strauss-Kahn sees Renewed Stability but remains cautious about Global Economic Recovery, notes need for Continued Policy Actions IMF press release (4/9/09)
Beyond the Crisis: Sustainable Growth and a Stable International Monetary System Speech by Dominique Strauss-Kahn, Managing Director of the International Monetary Fund (4/9/09)
Brown urges further G20 spending (video) Gordon Brown on BBC News (5/9/09)
America’s Timothy Geithner says it’s ‘too early’ to withdraw economic stimulus Telegraph (3/9/09)
Finance chiefs warn against early end to state support for eurozone economies Guardian (3/9/09)
Keep spending – Darling warns G20 against complacency Independent (3/9/09)
Brown’s agenda deserves a hearing Financial Times (1/9/09)
Tories join Germany and France in call for exit strategy from G20 bailout Times Online (3/9/09)
UK recession: Why are we lagging our neighbours? Telegraph (3/9/09)
Reflections after the conference:
After the shock, challenges remain BBC News (7/9/09)
The G20 has saved us, but it’s failing to rein in those who caused the crisis Observer (6/9/09)
The world is as one on not endangering recovery Times Online (t/9/09)
Questions
- Why is the pace of recovery in the G7 countries likely to be modest for some time?
- Why have unemployment rates risen much more rapidly in some countries than in others (see page 19 of the OECD report)?
- Referring to the OECD report, how would you summarise changes in the global financial situation over the past few months?
- Assess the arguments put forward by France and Germany for reining in their expansionary fiscal and monetary policies.
- Why is the UK economy, according to the OECD, likely to be the last of the G7 countries to pull out of recession?
On 30 August, Japan’s opposition party, the Democratic Party of Japan (DPJ), won a landslide victory in the Japanese election. Although there are signs that the Japanese economy is beginning to pull out of recession (see Green shoots as autumn approaches), deep economic problems remain. Unemployment is at record highs; it has the highest national debt as a proportion of GDP of any of the G8 countries (see OECD Economic Outlook Statistical Annex Tables; consumer spending remains subdued; deflation seems entrenched; exports have slumped; bureaucracy is deeply embedded in government; and it has a rapidly ageing population.
So what is expected of the new government and what can it do? The following articles address these questions.
Japan’s Hatoyama sweeps to power (video) BBC News (31/8/09)
New Japanese government seeks a strategy for growth The Nation (Thailand) (1/9/09)
Japan’s new leader faces tough task Radio Australia (1/9/09)
Hatoyama faces daunting economic task BBC News (31/8/09)
DPJ needs to reinvigorate domestic economy of Japan China View (1/9/09)
Analysts worry DPJ’s policies may be a bane to Japan’s economy Channel NewsAsia (31/8/09)
Hamish McRae: Post election, what do the Japanese really want to do with their country? Independent (1/9/09)
Japan’s Government: Five Ways to Fix the Economy Time (1/9/09)
The vote that changed Japan The Economist (3/9/09)
Questions
- Paint a brief picture of the current state of the Japanese economy.
- What policies are advocated by the new government and what difficulties lie in the way of achieving the policy goals?
- What supply-side policies would you recommend for Japan and why?