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22 October 2018updated 02 Sep 2021 5:48pm

Why Mervyn King’s defence of Brexit “isn’t worthy of a Bank of England governor”

The former governor’s pro-Brexit screed is disappointing for a number of reasons.

By Tony Yates

Mervyn King, Mark Carney’s predecessor as the governor of the Bank of England, has burnished his Brexit credentials in an opinion piece for Bloomberg

King has made his pro-Brexit views known already. The trigger for reprising them was the publication of the Bank of England’s assessment of different trajectories either through or without Brexit.

In 2013 he is quoted as saying “you just cannot appear to do anything which potentially makes life difficult for your successor.”  Apparently, the dictum was so important that King would determine not even to think bad things about the next governor. “Even to talk about what is going on at a lunch or dinner in London, you don’t want to do it.  And from that follows a wish not to think about it.”

These scruples are spectacularly set aside in his latest op-ed:

“It saddens me to see the Bank of England unnecessarily drawn into this project,” King writes, where “this project” refers to one begun before the EU referendum that involved “official economic projections intended to scare the country into voting Remain.”

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The latest analysis by the BoE is presented as an objective assessment; the projections were solicited by the Treasury Committee. So we have to take it that the former governor thinks the current one is lying about what he really thinks about the consequences of Brexit, and is doing so either because he is coerced or hoodwinked by or conniving in a plot to ‘scare the country into voting Remain’.

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He takes issue with the large negative impact on the economy (surpassing 10 per cent of GDP) estimated by the bank in the scenario it identifies with a disorderly exit to World Trade Organisation terms (otherwise known as “no deal”). But he doesn’t really offer much of an explanation of why. He mentions that he has read a Paul Krugman column that calls the effects “black box” and quotes Krugman’s rebuttal “Really?”, and then describes the bank’s distillation of the empirical evidence on the effects of trade on productivity as “the assertion” and moves on.  He does not mention that the projection is not the bank’s guess at the expected outcome of “no deal”, but a scenario designed to inform stress tests of the banks.

This is, to put it mildly, rather flimsy evidence on which to build an accusation of a politically motivated conspiracy.  A conspiracy that would require considerable sophistication, not to mention executive team and staff discipline to hold firm without leaks. And the outcome of which is a report in the spirit of the overwhelming consensus of economists who have looked at the matter. 

Some readers may discern the irony in the charge King levels at the bank. They might recall how King allowed himself “to be drawn in” to expressing an opinion – prompting the objection of fellow MPC members – on the relative merits of the fiscal plans on offer, both before and after the 2010 election. Offering no more than his words at the time, his conclusions would have also appeared rather “black box”. And they might have been taken to be designed to “scare the country into voting” for austerity.

Mervyn King’s article thumps many of the familiar Brexit drums, but without offering the main protagonists in the negotiations, of whom he is clearly (not without some justification) contemptuous, any way forward.

He scolds the government for agreeing to “hand over £39bn”, omitting to mention that these are already incurred liabilities, and indeed in large part pension liabilities, rather like the sums “handed over” to King himself each month during his retirement. 

King sketches the consequences of acceding to Theresa May’s deal in the most graphic terms, as a “betrayal” and leading us to “this state of fiefdom”. He thinks that ultimately the withdrawal would be cast off anyway: “vassal states do not go gently into that good night. They rage.” It is not clear, but one might hope that “rage” in this misquoting of Dylan Thomas refers simply to not respecting a Treaty. As Dan Davies remarked, after a referendum campaign in which an MP was murdered, hysterical and ambiguous warnings like this are irresponsible. 

“Trade and contacts among the nations of Europe can and should continue much as before,” he writes. But, again, without specifying how. 

King wishes that “An immigration policy for the post-Brexit world could and should have been published in 2016.” But doesn’t seem to grasp that this, and disentangling ourselves from the “political project in which [the UK] had little interest in”, implies leaving the single market, leading, with current technology, to a hard border between Northern Ireland and Ireland – which neither the EU nor the UK find acceptable.

It seems extraordinary at this point in the Brexit debate, after the impossibility of guaranteeing a soft border without the “Backstop” has become clear, that Lord King fails to acknowledge this fundamental trade-off inherent in Brexit, (more political distance means more trade frictions and less trade) nor the specific problems with the island of Ireland.

In common with other Brexiters, King thinks that the government should and could have made “no deal” a credible fall-back position: “Preparations for Brexit based on trade under WTO terms should have started in 2016”. But what preparations, short of vast investments in physical, IT, and administrative systems, would have helped? What use would they have been without reciprocal investments with EU countries bordering us? And in Ireland too? How could such preparations have born fruit in time? The former head of a public body that wilted under more mundane administrative challenges, and used to struggle fitfully to roll out updates of Microsoft Windows, many years post release, does not explain.

This lack of preparation has “proven disastrous”, yet King seems to conclude, the “disaster” that confronts us now is not enough to dissuade him from urging us to use the threat of no deal to proceed.  And it is also not as “disastrous” as the BoE scenarios of a 10 per cent fall in GDP, which we must conclude are politically tainted. Although, if you are still with me, the real “disaster” that has to be avoided is the “rage” associated with unilaterally reneging on the Treaty later on, but which is still not “disastrous” enough to make Carney’s worst-case scenario a relevant one with which to study the fragility of the balance sheet of the banking system.

King recounts with verve previous occasions on which “the British political class let down the rest of the country”; the failure to credibly threaten no deal in order to allow us to re-write the rules of the single market apparently being another. King’s word limit presumably prevented him from mentioning the other time that the “political class”, and economists in general, let the country down, when it failed to respond to risks building in the financial system.

The class of which he speaks – he is not confining his ire to 10 Downing Street – is too divided to be treated like a single entity guilty of “incompetence on a monumental scale”. But if there has been a failure, it was of the faction to which King wishes to lend his heft: in its dissembling about the economic consequences of Brexit and about the political choices and trade-offs facing the country. 

These failures seem most responsible for the current predicament of the UK and they are contained in microcosm in King’s article.

Rupert Harrison, George Osborne’s former chief-of-staff, summed King’s intervention up tersely, but aptly: ‘it saddens me to say it, but Mervyn’s piece is not worthy of a former governor of the Bank of England.’