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Post BREXIT confusion

David Blanchflower opines: Mark Carney is what stands between Britain and economic chaos ... Brexiteers with little grasp of economics are lining up to undermine Carney. Theresa May should ignore them and do everything she can to keep him

Burgess COMMENTARY

Peter Burgess

Mark Carney is what stands between Britain and economic chaos Brexiteers with little grasp of economics are lining up to undermine Carney. Theresa May should ignore them and do everything she can to keep him

Bank of England governor Mark Carney leaves 10 Downing Street. Photograph: Stefan Wermuth/Reuters

Mark Carney is unequivocally not responsible for the slowing of the UK economy or the fall in the pound. Quite the contrary, he almost single-handedly turned around a potential collapse in output and sentiment in the days after the EU referendum on 23 June. Far from harming Britain, Carney has been the country’s saviour.

I have criticised the Bank of England governor rather harshly in the past, especially for his claim in August 2015, that “sustained momentum” in the UK economy and rising inflation would “likely put the decision as to when to start the process of gradual monetary policy normalisation into sharper relief around the turn of this year”.

That didn’t happen. But I have changed my mind. Right now we all need to stand behind Carney for the good of the country. Without him, chaos reigns.

It was entirely appropriate for the prime minister to back Carney even though she undermined his position in her speech to the Conservative conference earlier this month. The mistake was waiting so long to do so. The “Mayhem” government must now do everything possible to keep him in place, for his full eight-year term. The UK has already been relegated from fifth to sixth largest economy in the world, moving behind France, as a result of the Brexit vote and its credit rating has been downgraded.

In the space of a few days, non-economists William Hague and Michael Gove have attacked central bank independence

I find it astonishing that in the space of a few days, non-economists William Hague and Michael Gove write newspaper columns attacking central bank independence while Daniel Hannan, a former journalist and a Eurosceptic Tory MEP, goes on the BBC denouncing Carney in similar terms, in an apparently coordinated campaign.

There were even utterly idiotic suggestions that Jacob Rees-Mogg, a Tory MP who knows no economics and has a degree in history, should replace Carney. It was even mooted that the independent Office for Budget Responsibility forecasts should be ignored if they dared to suggest the economy was slowing. Liam Fox, who is a medical doctor with no training in economics, astonishingly ordered Chancellor Philip Hammond not to start “Project Fear Two” in the latest Brexit spat. Fox apparently urged Hammond not to inject fiscal stimulus as it may cause Britons to “wrongly” panic about the impact Brexit may have on the economy. As the Bible advises: “Stay away from a fool, for you will not find knowledge on their lips” (Proverbs 14:7).

The Oxford economist Simon Wren-Lewis has argued, rightly, that there seems to be a “large element of shooting the messenger in the attacks on Carney. He warned of the short-term difficulties Brexit might create, and helped take decisive action to avoid those dangers. But to the Brexiteers, it is an article of faith that Brexit can only bring good, so in their make believe world Carney is responsible for talking down the economy.” He isn’t.

But the this isn’t just a spat about who said what after the Brexit vote. Threatening central bank independence raises the UK’s risk premium, which is the return in excess of the risk-free rate of return an investment is expected to yield. An asset’s risk premium is a form of compensation for investors who tolerate the extra risk, compared with that of a risk-free asset, in a given investment. We know that UK borrowing costs fell when the Bank of England was made independent in 1997, replacing the Ken and Eddie show. Ex Bank of England economist and Birmingham University professor Tony Yates told me that, “if Carney were to go, markets would presume we are like tin pot economies where the central bank governor, regardless of the formal framework in place is assumed to be politically pliant”. That would be very costly.

Apple has already announced price rises of 20% for its computers as a result of the sterling devaluation. Inflation is set to rise and living standards will start falling again after a couple of years of real wage growth. Real wages are still 7% below their pre-recession peak. The concern as my old friend ex-MPC member Adam Posen made clear this week is the UK enters a new period of stagflation of low growth and high inflation caused by Brexit.

It is early days, but negotiations on Britain’s future relationship with the EU already seem to be going badly. The EU side holds all the bargaining chips, not least because 27 other governments, plus the national parliaments, including the Walloon government who objected to the EU trade deal with Canada, will have to agree to any deal. This may be as good as it gets for a while. But three cheers for Carney.

May backs Carney to serve full term as Bank of England governor Read more