William Keegan has seen Black Wednesday, three-day week and the devaluation of the pound, but Brexit is the one that scares him the most
PUBLISHED: 17:36 30 August 2016
In a career spanning more than 50 years, Britain's leading economics writer William Keegan has reported on some dark days for the country. Here, he explains why nothing so far compares with what lies ahead
In the course of writing about the British economy for half a century, I have covered many a crisis and witnessed the consequences of some bad policy decisions. But nothing, absolutely nothing, compares with the unadulterated insanity of the calling, conduct and results of the Brexit referendum.
One early crisis was the devaluation of the pound in 1967, a necessary step economically, but politically disastrous because the Wilson government had set the value of the pound up as a totem pole, from which there could be no deviation. The result was political and international humiliation, aggravated by a well-intentioned quote from the Prime Minister – remembered to this day: “The pound in your pocket has not been devalued.”
I say “well-intentioned” because the idea behind it, offered by a civil servant I knew, was to try to explain that people’s spending power would not be affected by the full extent of the devaluation (of around 15 per cent) but only by a fraction of this, to the extent that they bought imported goods. But lasting damage was done. The fact of the matter was that the pound in our pockets HAD, to some extent, been devalued.
Other crises that figure prominently in the memory were the humiliation of resort to the “three-day week” in 1972 under Edward Heath’s government, and in 1976 when the Labour government of James Callaghan was forced, by a collapse of confidence in the financial markets, to go “cap in hand” for a major loan from the International Monetary Fund.
Those were, to a large extent, the consequence of bad policy decisions as, 16 years later, was the Black Wednesday episode of September 16, 1992, when the Major government was forced to withdraw the pound from the European Exchange Rate Mechanism after less than two years of membership.
I regard the huge and lasting pain inflicted on the British economy and many members of the population by the monetarist phase of Margaret Thatcher’s government from 1979 as a policy error stemming from an erroneously conceived domestic economic policy, which I coined “sado-monetarism”.
A similar argument applies to the way George Osborne arrested a burgeoning economic recovery in its tracks from 2010. This was a mistaken policy decision, under which an ideological desire to shrink the state was disguised by a somewhat eccentric claim that the way to emerge from recession was to cut public spending rather than increase it. To people who claimed “you can’t spend your way out of recession”, the appropriate response was “there is no other way of doing it”.
Now, although I felt angry about the way some of these events were precipitated and handled, I do not recall feeling so utterly depressed and furious as I – and, I think, many of my friends and acquaintances – feel about this whole Brexit business.
Nor do I forget the two oil shocks of the 1970s or the financial crisis of 2007-08. But none of these events was caused by domestic policy errors. They were big crises, with huge consequences, but –notwithstanding the outrageous and all-too- successful efforts of Messrs Cameron and Osborne to blame the financial crisis on the previous Labour government – these were external shocks to the system (“events, dear boy”, in Harold Macmillan’s famous phrase) but not brought about by us or our leaders.
But Brexit is different – very different. This is self-imposed, by a prime minister whose error of judgement in calling the referendum ranks with Anthony Eden’s over Suez in 1956 and Tony Blair’s over Iraq in 2003.
The difference is that whereas Eden and Blair have been accused of misleading the public, as well as themselves, Cameron merely misled himself: he had the arrogance to believe that he could wriggle out of the commitment with the help of the Liberal Democrats. But when the expected second Coalition did not materialise, he was still arrogant enough to believe he could carry it off. So many things in life had come to him so effortlessly!
For those of us who watched the painful efforts of successive governments – the Conservatives under Harold Macmillan, Labour under Harold Wilson, and, finally, the Conservatives under Edward Heath – to enable us to join the European Economic Community, it hardly bears belief that, unless there is a serious rethink, we are about to discard the economic benefits of the European Union for the nebulous advantages of so-called “sovereignty”.
I wonder how many of those Brexiters who say everything will be fine and that we can opt for the European Free Trade Association realise that it was precisely because membership of EFTA in the late 1950s and early 1960s was unsatisfactory that we opted for full membership of what is now the EU. And within days of the referendum Angela Merkel emphasised that access to the single market would still be dependent on acceptance of all four principles – not just free movement of goods, services and capital, but also of labour.
However, we are told, why worry? After all the scare stories there have been some good consumer spending figures. Brexit is fine, they say. I am not exaggerating: this is a fair summary of the reporting of much of the media during August.
They just do not know what is going to hit them when the collapse of investment plans geared to our membership of the EU makes its full impact on output, growth and, eventually, jobs. As Paul Johnson says in the September issue of Prospect: “If we end up out of the single market and lose a substantial part of the financial services industry, the rest of us will have to pay the huge quantity of taxes that they currently pay, or suffer worse public services. If we restrict immigration of overwhelmingly young, educated and hard-working citizens from the EU then, again, the rest of us will have to pay taxes they would otherwise have paid, or suffer worse public services.”
Paul Johnson is Director of the Institute for Fiscal Studies, one of the most respected economic institutions we have. It is politically independent and does not indulge in scaremongering for the sake of it.
Again, Andrew Duff of the European Policy Centre, commenting on the referendum result, has pithily concluded: “The notion of sovereignty weighed more heavily than the reality of political power: a majority of voters preferred not only a poorer Britain but a less powerful one too.”
Did those crucial swing voters know that this was the likely prospect they were voting for? In a scathing attack on the general level of economic reporting and misleading proclamations of “balance”, Simon Wren-Lewis, professor of economics at Oxford University, notes in the July newsletter of the Royal Economic Society that “this style of reporting was particularly evident in the EU referendum campaign, where the £350 million a week figure was reported as ‘contested’, even after the UK Statistics Authority declared it incorrect.” Wren-Lewis cites his fellow economist Paul Krugman’s jibe that: “If a mainstream political party declared that the earth was flat, the media would report this as ‘shape of earth: views differ’.”
It is not only the future of the economy and, indeed, of the United Kingdom, that is at stake. The rest of the EU is also apprehensive. It would be a tragedy if all that has been achieved in Europe is dismantled in a kind of domino effect initiated by Brexit, with President Putin just rubbing his hands from the sidelines. For in many ways, great though one’s concerns are for the economy, the possible geopolitical consequences are even more disturbing.
After all, the EU was designed to bring political harmony and avoid further wars, by economic means. These are dangerous times and Brexit would hardly make them less dangerous. It is not too late to rethink. In general elections, political parties in Britain may make rash campaign promises which they cannot subsequently honour. But they do not, in my experience, put outright lies at the centre of their campaign.
That is what the Brexit people did, and too much is at stake for this to be taken lying down. And was it not the egregious Nigel Farage who once declared that there should be another referendum if the result was 52% to 48% against him?
I am not sure that the country could stand another referendum. But I do think that our elected representatives should get their act together fast in the House of Commons.