Carney, U.K.’s most important person
The Bank of England governor has plenty of valuable experience steering economies out of crises
It’s not often that a person is called upon to navigate a major economy through rough seas.
Mark Carney, governor of the Bank of England (BoE), has done so twice. And he will have done so three times if he can keep the U.K. economy stable during the divorce negotiations between Britain and the European Union. Those two years of talks, to begin in March, were triggered by Britons’ narrow vote on June 23 to quit the EU.
After recent weeks of worldwide speculation that Carney might quit the BoE next year, a relieved Downing Street was able to announce Carney had extended his stay one year until the difficult U.K.EU negotiations conclude in 2019. The pound rose in trading that day.
Carney, a 51-year-old native of Fort Smith, N.W.T., might be the most important person in Britain.
Theresa May, the prime minister, learned that the hard way.
In October, she unwisely used her Tory party’s high-profile annual policy convention to take Carney to the woodshed.
May told the assembled that there were “bad side effects” to the BoE’s postBrexit deep-discount interest rates and injection of stimulus funds into the economy.
In fact, those measures kept the U.K. economy from going over a cliff.
After May’s attack on Carney, which broke the inviolate rule that central banks are independent of government, world currency markets took May to the woodshed.
The pound dropped 6 per cent in October. That month, sterling was the worst performer among the 150 world currencies tracked by Bloomberg.
Downing Street made a rushed apology to Carney. But the damage was done.
Members of May’s cabinet openly criticized Carney. And leaders in the anti-EU “Leave” campaign renewed their criticism of Carney for his pre-Brexit observations that quitting the EU was not the best way to advance U.K. prosperity. May’s speech had signalled that it was open season on “the Canadian,” as the U.K. press often refers to Carney.
“(Carney) warned of the shortterm difficulties Brexit might create, and helped take decisive action to avoid those dangers,” Oxford economist Simon Wren-Lewis told David Blanchflower, economics analyst at the U.K. Guardian.
“But to the (anti-EU) Brexiteers, it is an article of faith that Brexit can bring only good. So in their makebelieve world, Carney is responsible for talking down the economy.”
May is likely unaware of the Carney backstory that traders from Tokyo to Manhattan know in detail.
The backstory, of course, is that as governor of the Bank of Canada (BoC), Carney did a superb job piloting Canada through the Wall Street meltdown and the resulting Great Recession. Indeed, Carney was lauded as perhaps the best central banker among the major economies.
That’s why then-U.K. Prime Minister David Cameron poached Carney to head the BoE in 2013. Good move. At the BoE, Carney was among the first Britons to anticipate the possibility of a Brexit shock come June 23, the day of Cameron’s risky referendum on whether Britons preferred to leave the EU or remain within it.
Early this year, Carney was building up reserves with which to flood the U.K. economy with funds and maintain global investor confidence in the U.K., should a Brexit shock occur.
Carney’s BoE began buying huge volumes of U.K. government debt, a backdoor means of enabling government to stimulate a faltering economy.
That unorthodox practice is called “quantitative easing” (QE), a term sufficiently arcane not to frighten the children as the central bank amasses debt.
In the immediate aftermath of the Brexit shock, Carney’s actions kept the U.K. economy surprisingly stable. Leaders in the Leave campaign used that stability to mock those who had said prior to the Brexit referendum that the sky would fall in if the Leave won.
The Leave crowd did that even as they criticized Carney, who had ensured that their disruptive actions would not crash the U.K. economy.
But the British economy is hardly out of the woods. Just the opposite.
Real wages remain 7 per cent below their pre-Great Recession peak. The drop in the pound has raised consumer prices. Apple Inc.’s 20-per-cent price hike on its computers is among the prominent examples.
Brexit has caused the U.K. economy to slip to the world’s sixth-largest from fifth, now behind France — a humiliation the “Brexiteers,” those ardently seeking to quit the EU, refuse to acknowledge.
Britain’s credit rating has been cut, and the “risk premium” on government debt and other sterling-denominated securities has risen.
Both factors have increased borrowing costs for Britons and British companies. And economic conditions are bound to further worsen.
Once May invokes Article 50 in the EU charter in March, a maximum of two years of U.K.-EU divorce negotiations commence. In those talks, Britain’s fate is hostage to an EU that is in a far better bargaining position than the U.K.
The EU will play hardball in order to discourage other defectors. And the divorce settlement — if one can be reached in the relatively short space of two years — must be approved by all 27 other EU governments, and by sub-governments like Wallonia, which briefly held up the free-trade deal between Canada and the EU.
If even one of those scores of potential dissenters uses its veto, Britain will come away from the twoyear negotiations with nothing. Nada. And it will no longer be an EU member, losing access to the EU’s Common Market.
That’s when the dismantling of the U.K. begins, starting with a pro-EU Scotland quitting Britain. A pro-EU London is bound to declare its independence, rather than suffer its mainstay industry of financial services losing its preferential access to EU financial markets. And a pro-EU Northern Ireland will be tempted to merge with EU member and kindred spirit Ireland.
Under the circumstances, it’s not surprising that May — whose fumbling young government has already earned the sobriquet “Mayhem” — practically begged Carney to stay on.
Remarkably, Carney now faces a third Category 5 crisis to manage, after keeping the U.K economy stable in the immediate aftermath of Brexit.
He has just agreed to stay on through what are sure to be acrimonious breakup negotiations with the EU. In that two-year stretch, Carney will have to meet each British setback in the negotiations with inventive means of keeping the sterling from falling further, and stopping an already worrisome level of inflation from rising further.
“Carney has been the country’s saviour,” says the U.K. Guardian’s Blanchflower. “Without him, chaos reigns.”
If he shows up at Heathrow with a one-way ticket home, MI5 might escort him back to the BoE’s home on Threadneedle Street.