Time to dethrone these fractious grandees of the Bank of England
Heated and unseemly argument is par for the course in today’s ever more fractious Brexit debate, but to see the former and incumbent holders of the office of Governor the Bank of England reduced to what can only be described as a kind of bar room brawl takes the public rowing to new heights.
It is hard to think of any precedent for such a spat; the unwritten rule of central banking is that you do not criticise either your successor or your predecessor.
Yet the gloves were well and truly off last week when Mervyn King said it “saddened” him to see the Bank of England drawn into the Brexit debate by trying “to scare the country” on the possible consequences of a no-deal Brexit. This from a governor who expressed no such sadness when he waded into what at the time was the equally politically charged debate over fiscal austerity just ahead of the 2010 election.
Quick as a flash, his successor, Mark Carney, responded in kind, accusing Lord King of presiding over “a less successful” period at the Bank when it had been too focused on inflation targeting either to spot the financial crisis coming or to respond swiftly enough to its onset. Both of them are right in their criticism. What were intended merely as worst case, Armageddon-type scenarios to test whether the banking system could withstand such an economic meltdown, were, with apparently deliberate intent, spun as what might, or indeed would, happen in the event of an acrimonious no-deal Brexit. The optics were appalling; it looked like the Bank and the Treasury trying to scare MPS into ruling out a no-deal exit. Judging by what happened in Parliament last week, they may well have succeeded.
Yet the scenarios outlined were so extreme as to be almost laughable. Particularly absurd was the idea that interest rates could rise to 5.5pc. The Bank has struggled to raise them from the zero-bound even with sustained growth; what makes it think it could ratchet them up to pre-crisis levels in the event of a deep recession is beyond me. Equally beyond me is the implication of Lord King’s analysis – that a no-deal Brexit will be but a small hiccup with limited economic repercussions. It seems to me a matter of simple common sense that if barriers to trade that didn’t previously exist are erected with your biggest trading partner, there is bound to be a cost, particularly in circumstances where the divorce is acrimonious. There are plenty of good arguments for Brexit, but the economics of it have always been some of the weakest. It is true that Brexit might galvanise the kind of structural adjustment that could in the long term be good for the UK economy. But that depends crucially on how policy responds. It is not necessary to leave the EU to bring about such a change. It is almost entirely within our own gift.
As one Telegraph letter writer observed, when Lord King spoke of “incompetence on a monumental scale”, he was surely referring not to Theresa May’s handling of the Brexit negotiations, but his own state of unpreparedness for the financial crisis. Lord King cites three episodes in modern history when the political class has failed the country – appeasement during the Thirties, the economic stagflation of the Seventies and today’s Brexit negotiations. But hold on. Isn’t there something missing here? It is possible to date many of today’s discontents to just one event, the Global Financial Crisis.
Lord King was hardly alone in the policy failures that marked that time, but he was also right there in the thick of them. In their arrogance, central bankers to this day refuse to acknowledge their own starring role, preferring instead to highlight belated attempts to clear up the mess and prevent it from turning into a second Great Depression. The jury, it might be said, is still out on that latter one.
A plague on all their houses. These philosopher kings of the monetary system, these lords of finance, are too grand and self regarding for anyone’s good, opining on areas of public policy that are none of their business, and via their actions frequently influencing things that rightfully belong to the political sphere. They need taking down a peg or two, or even stripping of their treasured “independence”, reduced in any case to little more than a charade at today’s Bank of England, where the Governor and one of the deputy governors are former Goldman Sachs apparatchiks and the three other deputy governors are all former Treasury mandarins. Never before has the Bank so obviously been hand in glove with the Treasury than it is now. It’s a rum old state of affairs and no mistake.
Service industry sell-out
I’ve written it on numerous occasions before; one of the great puzzles of the Brexit debate is its obsession with trade in goods. Yet as the Centre for European Reform’s Sam Lowe points out in a new analysis, the much bigger threat to trade is via Britain’s services sector, accounting for nearly a half of all UK exports, of which around 40pc go to the rest of the EU. What is more, unlike goods, where the UK runs a substantial trade deficit with the EU, on services we run a big, partially offsetting, surplus.
What happens when/if we leave Europe’s internal market? It’s not good, according to Mr Lowe. Countries deliberately make it hard to export services, with the result that international services firms selling into foreign markets largely do so from offices based in the country they are “exporting” to. Yet through its single market, the EU allows a much higher degree of genuine cross-border trade in these activities than exists almost anywhere else. The upshot is that whereas 67pc of UK financial services (excluding insurance) supplied to the EU are exported cross-border, the same is true for only 28pc of those sold to the rest of the world.
It follows that on losing the EU’S so-called passporting rights, service exports to the rest of the EU would shrink markedly, possibly right down to the levels that pertain with non-eu countries. The EU’S equivalence regime should partially mitigate these negatives, though it means submitting to the “vassalage” of rule taking Brexiteers hate so much. Yet there was no mention of the “enhanced equivalence” the UK aspires to in the political declaration that accompanied the Withdrawal Agreement. What’s more, the direction of travel in the EU is clear; on multiple fronts, it is trying to make it more difficult for non-members to sell to the bloc. The bottom line is that in pursuing immigration controls, which necessarily means leaving the single market, the Government is trading the future of some of our most successful industries.
If any more reason were needed to oppose Theresa May’s approach to Brexit, this particularly damaging sell-out provides it in spades.
‘The unwritten rule of central banking is that you do not criticise either your successor or your predecessor’
Mark Carney, the Governor of the Bank of England, has been drawn in to an unseemly war of words with his predecessor Lord King that does no one any favours