Time to de­throne these frac­tious grandees of the Bank of Eng­land

The Sunday Telegraph - Money & Business - - Business - JEREMY WARNER

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

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