Election shock for finance
THE outcome of European elections in Britain and on the Continent portends big disruption in the way that economic policy is conducted.
With due respect to Philip Hammond – a stoic supporter of Theresa May’s deal – the greater likelihood of a Brexit Prime Minister will weaken his tenure at the Treasury.
It also makes it unlikely that he will play the main role in choosing the successor to Mark Carney at the Bank of England. The selection process is meant to be over by October 2019, ready for transition to a new governor by January 2020.
Across Europe, the 30pc of the vote landed by Eurosceptic and anti-establishment groups such as the Greens will change the chemistry in Brussels.
Britain’s Greens may be regarded as benign Remain supporters. But in Brussels they have been vociferous opponents of EU free trade deals with Canada and South Korea. The Green fear is that such deals align corporate interests and undermine EU regulation.
The result of European Parliament voting across the Continent changes the narrative about future Brussels leadership. It weakens the grand conservative coalition which has rallied behind Manfred Weber as likely successor to Jean-Claude Juncker as president of the Commission.
It also throws open the competition over who succeeds Mario Draghi as president of the European Central Bank. That is equally important, given Draghi’s €2.5bn stimulus programme and pragmatism, which have been a bulwark against a deep slump.
We broadly know what Hammond’s plans are if he were to stay as Chancellor.
BOlSTERED by a vanishing budget deficit, Hammond planned two big moves if May’s deal was approved. The first was the release of £15bn held to combat a disruptive or cliff-edge Brexit. The second was to reset government spending for the next three years to end austerity. Planned future spending on the NHS, with an extra £20bn or so, has been allocated.
The public finances are in good enough shape to deliver the fiscal boost necessary to cushion a supply-side shock if there were to be a No Deal. Claims made by Change UK’s Chuka Umunna about the dangers of No Deal are illusionary.
looser fiscal policy and direct assistance by the Bank of England to the financial system should minimise disruption. Most of
Britain’s FTSE 100 companies have futureproofed themselves against a No Deal and are more worried about a Marxist labourled government.
Hammond has signalled the kind of successor he wants to Carney. He is keen on someone with global status, reflecting the City’s role as the world’s financial entrepot. A Brexit Chancellor might prefer a harderline monetarist, less pliable than Carney. The key will be to get a candidate into the eight-year post before a Corbyn-led government gets anywhere near Downing Street.
Occupants of Threadneedle Street are semi-permanent fixtures not tested until the white heat of crisis. Carney passed that test after the referendum three years ago, when the Bank held a rocking banking system together. Hammond or his successor needs a pick for the Bank that understands the trade-offs among inflation, growth and unemployment but also recognises the requirement for a stable banking system.
After all, the failure to fix and recapitalise crumbling banks - from Germany to Italy and Greece – has been a fundamental cause of EU unemployment and populism.