Should The Queen Rule England Again?

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Includes: DRR, ERO, EUFX, EUO, FXB, FXE, GBB, ULE, URR
by: Bachar Samawi

Summary

The U.K. has prospered in the past despite substantial depreciation in its currency throughout past centuries.

The British monarchy's current "soft powers" could be more effective than absolute powers.

What lies ahead for the rest of the EU will determine the ultimate outcome of the Brexit vote and the long-term economic effect on the U.K.

The general public perception is that the current role of the British monarchy and Queen Elizabeth is mostly ceremonial in nature; presumably, power belongs to the people, as represented by multiple political parties, parliament, and a democratically elected Prime Minister. However, following the most recent Brexit vote, most such "democratic" institutions seem to be in disarray, with multiple party resignations, including Prime Minister David Cameron's own resignation; at best, a leadership vacuum currently prevails in the U.K.

Such turmoil and uncertainty has taken its toll on the British pound, trading around USD/GBP 1.295 at the close of 7/8/2016, a drop of over 12.2% from its pre-Brexit level of USD/GBP 1.4750 on June 23, 2016. The British pound is currently at its lowest levels since 1985. Could the Queen, or possibly the future King (Charles/William) exercise leadership and save the day? Have "democratic" institutions failed in their mission, under the exercise of "too much democracy"? Believe it or not, such questions are being seriously posed, as per July 5, 2016 article by Andy Serwer, "We're suffering the consequences of too much democracy."

USD/GBP exchange rate 1958 to 2016 - Source: Tradingeconomics.com

As our focus is typically financial and economic in nature, we are merely interested in deriving an educated outlook for the future of the British pound, and hence we are posing such "political" questions in the context of making economic sense. The default presumption is that economic sense dictates that nations would not typically deliberately sabotage their own long-term economic well-being; although there are numerous examples where political objectives have often detrimentally trumped economic well-being (such as in communist Soviet Union, North Korea, etc...).

In the case of the U.K., we are assuming that a highly educated western country with the fifth highest GDP in the world at USD 2.76 trillion will not ultimately "shoot itself in the foot". Hence, the title of this article merely insinuates that at the end of the day, the U.K., one way or another, is likely to execute a decision that it feels is in its best long-term economic interest. In essence, the Brexit vote is not an executed decision yet.

At this stage, the Brexit vote is a democratic expression of opinion. It will not become fact until it is adopted by Parliament. Although the public rhetoric of Brexit supporters converge under the slogan "we want the U.K. to get its sovereignty back", it may not be a matter of getting sovereignty (as in reality England already has sovereignty), but a matter of the U.K. exercising its sovereignty over others, for its own benefit; as part of the European Union, the U.K.'s ability to exercise its own sovereignty over others for its own benefit is curtailed. As for the Queen "ruling" England again, in order to provide leadership in the current apparent vacuum, let's not assume that the British monarchy is not already exercising its influence.

Exercising Sovereignty over Others

Although the U.K. is the fifth-largest economy in the world, according to the IMF, its GDP per capita (41,159 Geary-Khamis dollars "GKD") is currently ranked 25 in the world. Within western European countries, the U.K. is ranked behind all Scandinavian countries (but slightly ahead of Finland), and also behind France, Belgium, Germany, Austria, Netherlands, Ireland, Switzerland and Luxembourg. Perhaps, it is not surprising that U.K. citizens are unhappy about their status within Europe and voted for Brexit.

GDP per capita ranking 2015 - Source: IMF / Wikipedia

For the past 500 years, how did the U.K. fare economically compared to the rest of the world? In 1500, the U.K.'s GDP per capita at 1,086 GKD (1990) lagged Italy's 1,530 GKD, while it also lagged other continental Europe countries such as Netherlands, Germany and Belgium. In 1600, the U.K. continued to lag and even lagged Portugal, with its GDP per capita at less than half of the Netherlands.

World GDP per capita 1600 - Source: Our World In Data

By 1700, as England expanded exercising its sovereignty over others through the expansion of the British Empire, it reached a GDP per capita of about 1,513 GKD, and at such time only lagged the Netherlands. England maintained such position through 1800, and by 1820 its GDP per capita was the highest in the world (where recoded data is available). By 1850, it was still the highest in the world, alongside the Netherlands, and by 1870, U.K.'s GDP per capita of 3,190 GKD only lagged Australia's 3,273 GKD. In 1900, U.K.'s GDP per capita was once again once of the highest in the world at about 4,492 GKD, only behind Switzerland (5,899 GDK), which has always remained ahead of the U.K. at each decade interval within the last century.

World GDP per capita 1900 - Source: Our World In Data

By 1913, the rise of the U.S.A. made its GDP per capita the second highest (behind Switzerland) in the world at an estimated 5,301 GKD, followed closely by Australia and then the U.K. at 4,920 GKD. By 1929, the U.K. (5,503 GKD), only lagged the U.S.A.(6,899 GKD), Switzerland (8,636 GKD) and the Netherlands (5,689 GKD). In 1938, following the U.S.A. Great Depression of late 1929, the U.K. (6,266 GKD) overtook the U.S.A. (6,126 GKD), once again leading the world in GDP per capita (but behind Switzerland), including continental Europe and Australia.

World GDP per capita 1938 - Source: Our World In Data

In 1950, following WW2, the U.K. (6,939 GKD) lagged the U.S.A. (9,561 GKD), Venezuela (7,462GKD), Australia (7,412 GKD) and Canada (7,291 GKD), but remained ahead of all of continental Europe (with exception of Switzerland). In 1960, Scandinavian economies made additional headway, with Sweden & Denmark overtaking the U.K., along with the other countries from 1950. From that point onward, (1970, 1980, 1990, 2000, 2010) the U.K. has always lagged the U.S.A., Australia, Canada and Switzerland (and Sweden, except for 2000). In 1970, the U.K. also lagged France, Germany, Netherlands, and Denmark. In 1980, the U.K. lagged most western continental European countries, equaling Italy and only ahead of Spain. In 1990 the U.K. also pulled ahead of Germany.

World GDP per capita 1980 - Source: Our World In Data

On a comparative basis, from 1980 to 2000 (at decade intervals), it seems the U.K.'s GDP per capita fared its worst compared to continental Europe in 1980. In 2000, the U.K. was once again ahead of most continental European countries, with the exception of Switzerland, Norway, Netherlands and Denmark. Meanwhile, in 2010, the U.K. pulled ahead of Denmark, but fell behind Sweden. In essence, it seems that by 2010, the U.K.'s economy, when measured in GDP per capita, has actually fared well against continental European countries, with exception of Switzerland, Netherlands and Scandinavian countries.

However, as illustrated in the substantial details we have provided above, the Netherlands has done very well for centuries, while Switzerland has done very well since 1900. Meanwhile, Scandinavian countries have benefited from Norway's oil wealth, as well as from their unique social structure (Nordic capitalism / social democracies). However, since 2010, and as per IMF data provided above for 2015, it seems the U.K. has lost ground recently to most western continental European countries including Germany and France.

World GDP per capita 2010 - Source: Our World In Data

It seems the U.K. fared its best economically, when compared to the rest of the world and Europe (measured in GDP per capita), during the peak of its British Empire, when it exercised its sovereignty over others. Meanwhile, during the past 300 years, the British pound has been in constant state of depreciation, as per below graph (depicting an annual USD/GBP rate). Further below, we have also included an additional chart since 1915 that captures intra-year movements.

USD/GBP 1971 to 2016 (annual rate) - Source: graph derived from raw data by measuringworth.com

USD / GBP 1915 to 2016 - Source: miketodd.net

When did the British Monarchy lose influence in the U.K., or did it?

Some would argue that the British monarchy started losing absolute power as early as 1215 with the signing of the Magna Carta by King John of England. Others would argue that it gained momentum by the Glorious Revolution of 1688 where the Declaration of Rights gained power over the monarchs. Other contributing historical events include the Hanoverian Succession (1700s), as well as Queen Victoria's reliance on her prime ministers (she ruled the U.K from 1837 to 1876). Irrespective of when power started shifting away from the monarchy, it is clear that most would agree that it is well before the peak of the British Empire between 1900 and 1922. Hence, one can argue that the U.K. enjoyed its economic peak when the monarchy had already been disempowered.

However, the British monarchy, in principle, has the power to dismiss government, assent to legislation and appoint the prime minister. Although the U.K. monarch is constitutionally empowered to exercise the Royal Prerogative against the advice of the prime minister, the advice of the prime minister or cabinet has been required since the 19th century. It is recognized that such powers are a formality; hence, it is argued that the monarchy has three rights -- to be consulted, to encourage and to warn. In reality, in the case of a competent and experienced monarch, such "soft powers" can be even more effective than absolute powers. Hence, the queen does not need to "rule" England again; an astute and capable Queen (monarchy) can "rule" through such soft powers.

Where is the U.K. and the British pound headed?

Could Brexit be good for England? Most economic experts would argue that Brexit is bad for the U.K. and the British pound. We agree with them, as long as Brexit is not followed by a weakening of whatever remains of the European union. On the other hand, if the European union ultimately disintegrates, then we believe that the U.K. could actually benefit, while the British pound could benefit at the expense of the Euro. A Brexit, if followed sooner or later by the disintegration of the European union, will provide the U.K. renewed opportunity to "exercise" its sovereignty on others. Perhaps that explains why Nigel Farage, former UKIP leader, has "pledged" to help other countries leave the "illegitimate" EU.

On the other hand, in case the U.K. has no intention of exercising its sovereignty over others, and in case it does not encourage the "breakup" of the EU, then it is very hard to make a case of how Brexit would benefit the U.K. In such case, if the Brexit vote has been a political miscalculation, as opposed to being the first step in series of future earth-shifting steps for all of Europe, then is there a way out of the current mess? "Soft powers" could play a role here... Perhaps "soft powers" have played a role in a multitude of resignations and departing candidates, including Farage's resignation, as well as pro-Brexit Andrea Leadsom's decision to step away from running for prime minister, hence clearing the way for Theresa May to be the next prime minister.

For the next several months, uncertainty will remain. However, although from a long-term perspective the future of the British pound will remain unknown, depending on whether the Brexit vote is a political miscalculation or a preview for an attempt to break up the EU, we believe the Euro currently does not reflect any such risks, as we wrote in our article, "The inevitable fading of the Euro: Brexit."

Until the dust clears, it is possible that the British pound's decline could ultimately be reversed, at least against the Euro, especially if Brexit is a preview for further EU disruptions. Furthermore, a weaker British pound would not necessarily indicate economic woes for the U.K. As per charts provided above, the British pound had declined steadily for several centuries against the U.S. dollar, and yet, in 2010, the U.K.'s economy seemed to fare better than most European counterparts on a GDP per capita basis. Nevertheless, we still anticipate a depreciation of the euro against the dollar, as we do not believe that related risks are reflected in the current USD / EUR exchange rate.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.