Mark Carney, governor of the Bank of England, notoriously remarked in January that the UK was unduly reliant on ‘the kindness of strangers’ – a phrase that sounds like a lovelorn 1950s ballad from Frank Sinatra – to fund its large current account deficit.
Not just in the UK European Union referendum aftermath, but across Europe, governments and central banks are relying on the confusion of strangers to cover up a topsy-turvy dearth of consistency in policy-making.
George Osborne, the UK chancellor of the exchequer, has forgotten his earlier ill-thought out threat (in the event of an ‘out’ vote) of £30bn worth of higher taxes and lower spending, and is now promising to cut corporation tax to less than 15% to stimulate a post-Brexit economy.
Carney, whose 26 January statement to the House of Commons Treasury committee warned of financial instability, higher interest rates and capital flight if Britain voted to leave the EU, is now speaking, perhaps prematurely, of interest rate cuts if an economic downturn sets in.
Karl Otto Pöhl, the legendary former German Bundesbank chief, once cautioned on the risks of forecasting anything, ‘especially about the future’. Hans Eichel, the former German finance minister, said bluntly last week in London that Osborne’s warning of an emergency budget could only backfire because ‘you never get anywhere by making negative predictions’.
It’s all reminiscent of the dire September 1992 statement from John Major, then UK prime minister (and a doughty referendum Remain campaigner in recent weeks), who foretold ‘rising import prices, rising wages, rising inflation, and a long term deterioration in Britain’s competitiveness’ if the UK left the European exchange rate mechanism. Less than a week later, the pound was forced out of the ERM – leading to an impressive post-devaluation rise in the UK’s economic fortunes.
The disarray among those supposedly masterminding the British economy is nothing compared with upheavals among the contenders for the UK prime ministership.
David Cameron announced his resignation on 24 June, having said he would stay on if he lost. Boris Johnson, the Leave-backing former mayor of London, never believing he would win, astonished that Cameron threw in the towel, and trusting fellow ‘outer’ Michael Gove’s former denial of prime ministerial ambitions, has departed from the fray now that the justice secretary has decided to run after all.
Gove will assuredly receive some kind of spiritual or temporal reward for, with any luck, terminally damaging Johnson’s prospects of taking on mainstream national political office.
Either Theresa May (the favourite) or Andrea Leadsom, two pugilistic female Conservative ministers, looks set to replace Cameron in September after a bout of the Tories’ preferred summer sport, blood-letting. Particularly May, home secretary in Cameron’s cabinet, can be relied upon to get on well with Angela Merkel, the German chancellor.
Elsewhere in the EU, Italy is preparing to defy Brussels and fund its banking system with a multi-billion euro go-it-alone intervention that would gravely undermine the EU’s nascent scheme for dealing with troubled banks. Austria is organising a rerun of the May presidential election that caused alarm in Europe when a far-right candidate narrowly failed to win office. Jean-Claude Juncker, the embattled European commission president, is facing fresh criticism from Germany and may find himself prematurely departing from office after repeated scares about his health and competence.
One of the single largest question marks hangs over the exact procedure for the UK to leave the EU. A group of businesses is preparing a legal challenge to prevent the government from beginning formal Brexit negotiations without an act of parliament – the prelude to a possible constitutional showdown, in view of the majority of MPs who have been in favour of remaining in the EU. The denouement of the referendum drama is still months, if not years, away.
By David Marsh: David is a Managing Director of the OMFIF