Governor needs global vision
THE hunt for the next governor of the Bank of England has begun in earnest and the summer will be full of stories about the runners and riders. Mercifully, there are a host of really good men and women who would take the Bank through what will be a tricky period. But the ‘who?’ is actually less important than the ‘what?’ So, what kind of central bank will we need for our postBrexit economy? And what challenges will face the next incumbent of the Bank’s top job?
Let’s first deal with the challenges. Three huge ones loom. There will be the need to give stability to the post-Brexit economy. There will be the challenge of some sort of global downturn. And there is the wider question about the power of central banks worldwide: should they be more accountable to the societies they serve?
Whatever happens in the UK’s relationship with Europe in the coming months, we will need a governor who can help keep the
country looking out to the world. The UK already has an important global role. There are various measures: more foreign exchange transactions in London than any other centre; more people flying through London’s airports than any other place on earth; the largest community of non-national professionals.
This role needs to be cherished and developed. Our politicians are too partisan and too focused on their electorates to think globally. Central bank governors, by contrast, have to live with the power of worldwide markets. The Bank’s next governor will be one of the people who can encourage the country to look out, not in.
No one can know the scale or timing of the next global downturn, but we know there is an economic cycle and it must be an odds-on bet that the downward swing will occur during the term of the next governor. We know too that a decade of easy money has had high costs: rising wealth inequality and damaging savers.
There will be limits to what central banks can do when the slowdown comes. We will need a governor who can be persuasive about what can and cannot be done, and command respect if things get rough.
That leads to the role of central banks more generally. We have had a quarter century of central bank independence. In the US, the Federal Reserve has long had greater authority over monetary policy than the Bank of England. But when Gordon Brown came in as Chancellor in 1997 and passed decisions about interest rates to the Bank, what he did was part of a global trend. Why? Central bank independence was a response to the surge of inflation worldwide in the 1970s and 1980s.
But with inflation in the prices of goods and services now under better control, there is growing pressure to bring central banks back under political control. You can see this most clearly in America, where the challenge comes from both ends of the political spectrum. Donald Trump attacks the Fed for putting up interest rates. The charismatic Democratic politician Alexandria Ocasio-Cortez supports Modern Monetary Theory, a hitherto obscure branch of economics that holds that central banks should create more money so governments don’t need to raise taxes if they want to spend more.
Ultimately, central banks have to be answerable to wider society. But they also have to protect sound money and a stable banking system against powerful political and commercial lobbies. Our next governor needs to shout that message loud and clear in what will inevitably be tricky times. AN economic message from the sad story of the destruction of Notre Dame. The funds to restore it were pledged within hours. The two largest donors, Bernard Arnault and Francois-Henri Pinault, both made their money out of luxury goods: the great sprawling conglomerate LVMH, and Kering – owners of Gucci and Yves Saint Laurent.
Here is the message, and it is one about Europe as an economic entity. France is wonderful at luxury products. But other European countries are also outstanding in their different ways: Germany in engineering, Italy in fashion, the UK in finance.
Collectively, a lot of the best stuff going on in the world happens in Europe. There is a lot of pessimism about the European economy but we should cherish and celebrate its excellence, too. hamish.mcrae@mailonsunday.co.uk
We will need a Bank chief who commands respect if things get rough