Despite a degree of hysteria in the coverage this morning over the evidence given by governor Mark Carney to the Treasury Committee on 8th March, actually watching the proceedings might suggest a more balanced view.
All in all, it was pretty dry stuff. Jacob Rees-Mogg tried to push the point with Carney that his advice tended to take a pretty ‘pro EU line’ which was one which largely mirrored that of the Remain campaign. Carney rejected this as best he could. But I rather wonder what Rees Mogg expected from the Governor, a plea of guilty to EU bias maybe? It wasn’t going to be productive and was hardly forensic. I won’t go as far as to say that the committee was being used for a bit of grandstanding (though we have seen a lot of this in the past – Margaret Hodge always springs to mind as one of the most egregious cases of puffed up pomposity). It was a just a bit of a distraction.
Let’s be entirely honest about what the Bank of England is, and what it is not. The Bank is not a political entity, it is not its role to intervene in realms that are purely in the political sphere, such as the ones that John Mann raised with the governor, Jobs, prices and wages. These are political issues for the treasury to answer, not the Bank. The Bank has a particular role in Financial and Economic stability (and therefore the regulation of the banking sector), and in the setting of monetary policy (in which some of its remit is discharged in the setting of interest rates).
What the bank is not, is totally independent of government. This was a slight of hand perpetrated by Gordon Brown because he saw the damage that was done to previous chancellors over sudden rises in interest rates. This conjuring trick has been perpetuated by subsequent chancellors because it suits them to keep that potential hand grenade at arms length to their treasuries, because treasuries are now the vote driving machine behind modern politics. So when the Bank issues advice, I think it is inconceivable that the Chancellor has no input at all into the thinking, because he has a role in appointing the governor, and some members of the monetary policy committee itself. So of course, it’s a balancing act between the appearance of independence and the close co-operation that clearly must exist between bank and treasury.
So when the governor remarks that Brexit is the ‘biggest risk’ to financial stability then certainly the words of Mandy Rice Davis spring immediately to mind. “He would say that wouldn’t he?” In other news, bears defecate amongst large numbers of trees.
One element of the questioning from Andrew Tyrie was revealing, in that Mr Carney saw a very high probability that there would be a full Credit Default Insurance scheme agreed for the Eurozone – but despite the problems of economic imbalance in the Eurozone there would probably not be a move to a Fiscal Transfer Union. Anyone who has been watching the Eurozone crisis is well aware that the EZ has only two realistic options: Either they must break up the EZ and return to national currencies, or they must totally integrate their economies in a full Transfer Union. So in the same way that London provides funds for Liverpool through transfer of taxation income, then Germany must support Greece. The continual unrest that is caused by massive fiscal imbalances are set therefore to continue – the EZ is unlikely to be fixed.
The exchanges that actually caught my ear a little more were those between the chair of the committee, Andrew Tyrie, and the deputy Governor Sir John Cunliffe. Sir John was questioned about the deal that the government had struck with the EU, the reform package that has sent Cameron to the voting booths early.
Much of this revolved around the safeguards in place for the non EZ nations, in that access to the single market for financial services would not be disrupted by the EZ nations acting as a block.
On this, the reassurance was wafer thin.
This is because the Single Market operates on a system of Qualified Majority Voting. The Eurozone has a technical majority when it comes to the application of QMV. By use of a double majority system in terms of operation of the Banking Authority, it is possible at present for the Non EZ members to block technical changes.
And here’s where it gets interesting, on the issue of ‘Caucusing’. We know that as part of the treaties of Accession to the EU, all states bar the UK and Denmark are obliged to join the Eurozone, as and when their economies converge sufficiently with that of the EZ, they should be expected to fulfil this treaty agreement.
So then the ‘double majority’ is weakened, and at certain point the blocking minority ceases to exist at all, even under the current rules. So how does Cameron’s “Deal” alter this?
Sir John Cunliffe confirmed that in reality it did not.
And he was quite clear about the implications that the European Union could not accept that once a certain point was reached with EZ membership a very small number of states could hold back progress on EZ integration. And on the face of it, this is entirely reasonable, and exactly the response any organisation should give. The needs of the majority outweigh so greatly the needs of the minority that consideration must be ‘weighted’ in this way.
As Sir John pointed out – how could the EU get to a point where there might be only one or two non EZ countries holding back the process of integration with effectively what would count as a Veto. Once the accession countries have reached EZ status, this would leave Denmark and the UK with extremely high levels of ultimate power.
This is the reality of existing inside the EU, but outside the Eurozone. The EZ need to accelerate their development towards what amounts to a single integrated financial system – not quite a “single superstate” but with the individual nations devoid of the economic levers which confer the independence of statehood upon them. Sir John and Mr Carney both accept that this is a route which the UK can not and will never follow. So how does one reconcile the statements which they made on the ‘additional tools’ that the say the agreement supplies in their realm of ‘economic stability’ against this eventual loss of control which will certainly render the UK largely voiceless?
I see this as the clear contradiction in their evidence.
Andrew Tyrie, the Chairman of the Committee suggested that if one were to be going out into a dark night with such ‘protection’ then one might be somewhat concerned.
I find this hard to disagree with.