Mona Ali in British Politics and Policy:
Few nations have been as obsessed with their status in the world as Great Britain. Not surprisingly, the Government Statement at Chequers begins with the words that with its departure from the EU, the UK will ‘begin to chart a new course in the world.’ But can it? In recent research, I assess Britain’s macroeconomic resilience and economic power by examining its external balance sheets. As sovereign power only exists relative to that of other countries, I examine the UK’s balance of payments (BoP) against those of the US.
The flexibility of a nation’s external balance sheets is an outcome of its monetary power. Powerful currencies enable softer budget constraints. The US, issuer of the world’s predominant currency, finances its deficits by selling dollar-denominated securities to the rest of the world, and so bypasses the onerous process of deficit-reduction—which may involve devaluation, spending cutbacks, and trade protectionism. But BoP flexibility is not just a matter of monetary power. It could also be the outcome of a sovereign state’s standing in the global régime.