A flap of a butterfly's wings to freeze the UK economy

The economy has been sailing smoothly this summer. But winter is coming…

The coalition’s economic policies have benefited, like all of us, from the summer sun. But now the nights are drawing in, and the party conference season approaching. We all know that butterflies fluttering over the Amazon can cause snow in Chicago, and there are at least 4 butterflies whose flapping wings may deliver equally chilling results here in the UK in the next few weeks.

The first butterfly starts to flap a month from tomorrow, on September 22, as Germany goes to the polls. The approach of the German election has put the Eurozone crisis "on hold" for the past year. But the delay has made the problems worse, not better, with the Bundesbank warning again this week about the risks from "ongoing uncertainty about the economic policy situation" and the Eurozone debt crisis. The UK cannot therefore rule out the risk of a triple-dip recession in its largest trading partner, if Southern European economies continue to struggle. 

The US will set the second butterfly fluttering in October, when Congress debates the future of the sequester programme and the need to increase in the country’s debt ceiling. As in the Eurozone, US politicians have made a habit of postponing hard decisions in the hope that, Micawber-like, “something will turn up”. But government departments are now having to impose short-time working as a result of the sequester. For example, 650,000 Department of Defence workers are effectively on a 4-day week till September. And markets do not always stay calm once uncertainty rises and the rhetoric starts to fly.

Over in the east, October also sees a third butterfly released at China’s crucial economic policy meeting, the so-called “third plenum”. This is expected to endorse major reforms aimed at boosting domestic consumption from today’s miserably low level, and abandoning the current reliance on export-led growth. But this will not be easy, as China’s city-dwellers have average incomes of only £3000/year, whilst the half of the population still living in rural areas earn just £1000/year. This enormous shift in the world’s second largest economy must inevitably have consequences for us, most of which are currently unknowable.

The fourth butterfly is closer to home. New Bank of England governor Mark Carney’s much-heralded policy guidance has so far been ignored by the markets. Yields in the government bond market for the benchmark 10-year gilt have instead risen by 100 basis points, 1 per cent, since May. This lack of a honeymoon period is a clear omen of potential difficulties ahead for both borrowers and savers. Whilst an out-of-control housing market in London and the south east is making life very difficult for many buyers and renters.

Any of these butterflies could easily send a severe winter chill through an unprepared UK economy. They also highlight how wishful thinking about growth has come to dominate economic policy.

We know, for example, that consumption is 60 per cent of UK GDP, and that consumption falls away as people reach the age of 55. At this age, people already own most of what they need, whilst their earnings decline as they begin to enter retirement. Yet although the average boomer turns 55 this year, policymakers are still failing to connect the dots as regards the implications for GDP.

With 30 per cent of the UK’s population now in this New Old 55+ cohort, it is unrealistic to expect a repeat of the sustained growth seen when the boomers were in their prime wealth-creating years. Voters are not stupid. The party that talks about the new policies needed for today’s new normal, and not around them, will find itself best positioned for the 2015 election.

Photograph: Getty Images
Graham Brady illustration
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Tory backbench leader Graham Brady: “When we vote to leave the EU, the PM should stay”

As chair of the 1922 Committee, Graham Brady is a king among Tory backbenchers. So what does the ardent Eurosceptic make of David Cameron’s prospects in the EU referendum – and afterwards?

Enter Graham Brady’s office and you are treated to a magnificent panoramic view of the Palace of Westminster and Parliament Square. It is an appropriately grand vantage point for one of the most influential MPs. As the chairman of the Conservative backbench 1922 Committee, Brady is an essential barometer of Tory opinion. In recognition of this, he was one of the first guests to No 10 Downing Street in the hours following David Cameron’s general election victory. A prime minister with a majority of 12 – the smallest of any single-party government since October 1974 – must take permanent heed of his backbenchers.

I met Brady, 48, shortly before the start of Prime Minister’s Questions on 10 February. Among Conservative MPs below us in Portcullis House, there remained only one topic of discussion: Europe. Cameron’s draft agreement with the EU has failed to persuade many Eurosceptics that they should vote in favour of membership of the Union when the referendum is likely held on 23 June. Brady, who entered parliament in 1997 as the MP for Altrincham and Sale West, is one of those who intends to campaign for withdrawal.

“There is a very long-term problem that there is a massive difference between what Britain thought it was joining – the European Economic Community – and what it actually was joining,” he said. “There was no appetite or decision to join a political Europe . . . That is something that has always needed to be resolved in some way and I think the more the eurozone, in particular, integrates with the continuing crisis, the more we will have to see massive political and fiscal integration and probably, still, the departure of some of the weaker eurozone countries. As that process goes on, the United Kingdom has got to redefine its relationship in a meaningful way.”

In advance of the European Council summit in Brussels on 18-19 February, he warned that Cameron’s renegotiations had fallen far short. “The reforms that are being sought by the Prime Minister, while all welcome changes, don’t come anywhere near to that fundamental reform of the nature of our relationship with the EU.”

I asked Brady, who was elected to lead the 1922 Committee in 2010, how many of his Conservative colleagues he expected to join him. “It’s very hard to say. I’ve always thought that a clear majority of Conservative members of parliament are deeply unhappy about the shape of the current European Union. And probably a clear majority would have a preference of leaving the EU as it is today. I suspect that roughly 100 will declare that they’re campaigning for Britain to leave. But many more will be very sympathetic to that objective.”

His estimate of 100 is notably higher than the 50 to 70 predicted by Steve Baker, the co-chairman of Conservatives for Britain.

In recent weeks, Eurosceptics have complained as pro-EU cabinet ministers have campaigned for membership while front-bench opponents have remained “gagged”. Brady told me it was “not unreasonable” for Cameron to force them to abide by collective responsibility until the renegotiation had concluded. But, he added: “What is important is that once the deal is done things should be brought to a conclusion as rapidly as possible. I hope there will be a cabinet meeting, if not on the Friday after the Prime Minister returns, then on the Saturday morning, [so] that the cabinet can agree its collective position and also agree that those who don’t share that view are free to say so and free to campaign.”

Some MPs expect as few as five cabinet members to support EU withdrawal (Iain Duncan Smith, Chris Grayling, Priti Patel, Theresa Villiers and John Whittingdale) although others remain hopeful of persuading Boris Johnson and Michael Gove to join them. “I hope that everybody who is really committed to Britain’s future as a free, independent democracy will realise this is a key decision point,” Brady said.

“There’s no doubt that if Boris Johnson were to campaign for Britain to leave it would bring an energy and buzz to the campaign. Of course that would be welcome, and I hope that Michael Gove will resolve his dilemma in the same direction.”

I asked Brady if he was worried by what some Eurosceptics call “the Farage problem”: that the most prominent opponent of EU membership is also the most polarising. “Nigel Farage is very good at what he does,” he said of the Ukip leader. “He’s a very effective communicator with some audiences, so clearly he has a role in the campaign. Given the salience of the issue for him and his party, it would be unreasonable to expect him not to be prominent in the campaign. But he is a Marmite character and I think this is why it’s so important that there should be a wide range of different voices.”

Brady, who had just returned from a breakfast meeting in the City of London, told me that a number of business people have revealed to him that although their “institutional position is firmly that we should remain in the EU . . . privately their view is completely the opposite”.

Two days before we met, Cameron had been accused of “scaremongering” for warning that “the Jungle”, the refugee camp in Calais, could move to Dover in the event of EU withdrawal. Brady told me that the Prime Minister’s remarks were indeed “inaccurate” and that it was “enormously helpful of the French government to point out that it wasn’t going to happen”.

Were Britain to vote to leave the EU, as polls suggest is possible, many Tory MPs on both sides believe that Cameron would have to resign as Prime Minister. But Brady rejected this suggestion. “No. When we vote to leave the European Union I think it is very important that we have a period of stability. I think it would be hugely valuable to have an experienced team in place to deal with the renegotiation, I think it’s actually very important that the Prime Minister should stay.”

I noted that he referred to “when” Britain leaves the EU, suggesting he was confident of victory. “I’m always confident of victory,” he replied with a smile.

Given Cameron’s decision to pre-resign before the election by vowing to serve only two terms, there will be a Conservative leadership contest before 2020. I asked Brady whether, as some have suggested, the members’ ballot should be widened to include more than two candidates.

“The rules are constructed for each contest by the 1922 executive and agreed with the party board. The only stipulation in the constitution of the party is that we should provide ‘a choice’ to the party members. That has always been construed as a choice of two. I can’t see any reason why parliamentary colleagues would wish to reduce their own influence in the process by putting forward a larger field.”

The Education Secretary, Nicky Morgan, has argued that it is essential there be a female candidate (ideally herself). Brady offered her some advice: “I have very fond recollections of a woman leading the Conservative Party. I hope that if Nicky wants to launch her campaign seriously, she’ll talk to me about how we might promote more grammar schools and selective education as one of the ways that we can stimulate real social mobility in the country again – and she’ll have my support.” It was after the then shadow education secretary, David Willetts, argued in 2007 that grammar schools inhibited social mobility that Brady resigned as shadow minister for Europe.

If there is one stipulation that most Conservative members and MPs will make, it is that there be an anti-EU candidate in the field. I asked Brady whether he would consider standing himself.

“I say to people that I’m very happy with being the returning officer for any leadership contest,” he replied. But the man with a better feel for Conservative backbench opinion than any other ended our conversation with this prediction. “I do think it’s very likely that if we put two candidates forward to the party in the country, at least one of them will have been someone who campaigned for Britain to leave the EU.” 

George Eaton is political editor of the New Statesman.

This article first appeared in the 11 January 2016 issue of the New Statesman, The legacy of Europe's worst battle