Jefford on Monday: Britain’s Brexit hangover

Andrew Jefford scrutinizes the exchange-rate challenge for the UK’s wine traders and drinkers.

Summer’s over; back to work. Time to confront this autumn’s set of problems. For anyone importing or retailing wine in the UK, or making wine intended for export to the UK, one problem dwarfs all others.

When the euro came into existence on January 1^st 1999, you needed 71 British pence to buy a euro. By the end of 1999, indeed, you needed only 62 pence to buy a euro: sterling was flying. By referendum day in June 2016, the price of a euro had strengthened to 77 pence. Since then, sterling has collapsed while the euro has strengthened further: as I write, it costs 92 pence to buy a euro. HSBC predicts that you will need 100 pence to buy a euro later this year, while Morgan Stanley predicts that the pound will be worth less than one euro by early 2018. These are credible conjectures, and would take the pound well below its previous record low against the euro (which came in late December 2008). The pound is faring little better in historical terms against the dollar.

That’s the problem.

How sterling has changed against the euro. Image credit: poundsterlinglive.com / Bank of England

The strength of a currency reflects the global assessment of the economic prospects of that country. The Brexit decision (Britain’s second referendum on membership of what is now called the European Union) was viewed, globally, as a bizarre and ill-informed act of economic self-harm undertaken by largely elderly voters for mysterious emotional reasons. There was no plan in existence for Britain’s departure from the European Union. Nonetheless, Article 50 (which lights the fuse on a two-year departure process) was submitted by Britain on March 29^th 2017. It was succeeded by a General Election which comprehensively weakened the May government; then months of further chaos and indecision as the British government flounders its way towards a coherent Brexit policy. We’re not there yet. Small wonder that the global assessment of Britain’s immediate economic prospects is dim.

The inevitable result is that wine prices must rise further in the months ahead

Meanwhile, the European economy is moving forwards. There is no immediate challenge to the strength of the euro; with Trump in the White House, it is looking at present like the world’s dominant currency. A hike in British interest rates would strengthen sterling, but the Bank of England is unlikely to force the pace while wages remain stagnant, confidence is low and the British consumer is suffering.

The inevitable result is that wine prices must rise further in the months ahead, at a time when British consumers have less and less money to spend. Sales tax (VAT in the UK) has the effect of amplifying import costs, even without the government raising duty rates (which, in times of economic crisis, it might be tempted to do). Other alcoholic drinks, and especially those which can be fermented or distilled from sterling-zone raw materials, have the chance to increase their value differential with wine, almost all of which is imported. Those whose livelihoods are bound to wine face a gloomy twelve months – or more.

The only clear beneficiaries of this situation are the wealthy

No one likes to admit to doing badly, so the cries of pain from importers, merchants and retailers have been muted so far. The general consumer understanding that prices will rise over the coming months allows for some repositioning; certain sectors of the market may flourish (no surprise that Majestic is able to acclaim a 400 per cent rise in East European wine sales over the last year). There are creative solutions: following fashion; finding niches; working with suppliers on long-term solutions; seeking out less price-sensitive customer groups.

A wine shop in Limoux, southern France, promotes its ability to deliver wine across borders. Credit: Paul Quayle / Alamy Stock Photo, July 2016.

The only clear beneficiaries of this situation, though, are the wealthy: those who might wish to dispose of fine wines which are superfluous to their needs. They will find overseas collectors aplenty to mop up the excess at the healthy discount created by sterling’s plight. Wine businesses which specialise in selling wine to ordinary working Britons, though, will suffer, merge, downsize or close over the coming months as margins are squeezed without any commensurate rise in volumes to make up for that margin loss.

Faced with this prospect, what should Britain’s wine community campaign for? On the basis that the impact of Brexit thus far on the wine trade has been negative and worse is in store, some might be tempted to fight for an abandonment of the entire process. The coming economic pain, another argument runs, will win over more voters to the Remain cause, and the complications and ramifications of Brexit, little understood during the referendum campaign, will prove so bitter, costly and divisive as negotiations unfold that a third referendum will become an attractive and winnable prospect. The process, in any case, may eventually collapse under the weight of its complexity and its inherent conflicts and contradictions; or politics may intervene.

To wish for all this is to forget one key fact: the euro itself.

Future historians will surely conclude that it was Britain’s decision not to join the euro (taken by Gordon Brown in 2007) which made Brexit inevitable, since it permanently relegated Britain to the back seat of European economic decision-making: an untenably unsatisfactory position for Europe’s second largest economy. As long as Britain remained outside the euro, it was doomed to be excluded from the heart of Europe, and it could never contribute fully to the European project. British amour propre, however, would never countenance the ‘surrender’ of the national currency, with all its political implications – or at least not without charismatic political advocacy and an open-minded media. There was none then; there is none now.

Britain re-entering (or staying in) the European Union without committing to the euro would be pointless. It would be like winning a long and gruesome war without making a sustainable plan for peace. It would just prolong the pain of a relationship broken by the British insistence that ‘the island nation’ must forever remain semi-detached from the continent, and by the venom and falsehoods of much of the British press.

If I was a wine-merchant, then, I would not advocate a third referendum – but I would campaign forcefully for leaving the European Union on the softest terms our negotiating partners (and British parliamentary mathematics) are prepared to allow us. I deplore Brexit, just as I deplored the fact that no British political leader was ever prepared to make the case for adopting the euro – but both have happened, and the consequences are irreparable. A different future is now, regrettably, inevitable.

The key aim for the importing side of the economy should be to return some strength to sterling. The agreement of soft and harmonious terms for Brexit, though a complex and fractious task, would help bring that about; Brexit aside, the pound is undervalued. I doubt, though, that there is any desire for this in government. The few rays of sunlight for the British economy at present (tourist receipts, a rekindling of exports and record equity valuations) are directly related to sterling’s weakness. Continuing sterling weakness is in many ways the best short-term hope for the British economy through the Brexit process, despite the consumer (and wine trader) pain it will cause.

What about the long term? The EU may well function more effectively without British spokes in its wheels; the British economy, meanwhile, has the potential to recover quickly if a sane and consensual Brexit path is chosen with European negotiators, once that route is clear to all. Britain will have lost much of its political significance in the world, but that’s not obligatory for prosperity.

Whatever happens, Britain remains a European nation, and its geopolitical future is bound to that of Europe; it is truly in both the EU’s and Britain’s interests to ensure that the relationship works as well as possible.

Brexit does not, remember, mean an end for the British embrace of European ideals and values; indeed it has nourished that embrace, and this affection, which many Britons were so lamentably shy about expressing and defending in the past, will find political, commercial and social expression in the future. Demographics is on the side of pro-European sentiment.

British drinkers have been key customers for European wines for eight centuries or more; our passion for Europe’s wine has survived Agincourt, Napoleon, Kaiser Bill, Hitler, Franco and Mussolini, and it can certainly survive the end of what had become a damaged relationship with a transformative political union we joined late and never fully understood. Europe doesn’t, after all, want to lose the market for one quarter of its wines. There are tough times ahead for the UK’s wine traders, but not impossibly so.