“I don't think the country’s going to be governed right, under these circumstances.”by Jay Elwes / May 8, 2015 / Leave a comment
“The Brexit issue is just going to become dominant and it is the most important issue… for the British economy,” said Adam Posen, President of the Peterson Institute, the US think tank. Posen, a former member of the Bank of England’s Monetary Policy Committee, which sets UK interest rates, and who sits on the panel of economic advisers to the US Congressional Budget office was speaking in the immediate aftermath of Thursday’s general election.
His comments reflect international wariness of the electoral result, which brings closer the possibility that Britain’s relationship with Europe—and, says Posen, by association the US—will undergo fundamental change.
In his victory speech, delivered outside Number Ten Downing Street, David Cameron told a crowd of journalists that “yes we will deliver that in-out referendum,” on membership of the EU. If Britain were to hold a referendum and if the vote led to departure, the country would arrive at “something close to irrelevance,” said Posen. It would mark Britain out “as very nationalist, in the same way we used to talk about the US isolationists.” Once outside the EU, Britain would be “less valuable and a less dependable partner and in economic terms it makes it a far less attractive destination for corporate investment in the non-financial sector.”
“I think that this, combined with the cutbacks in defence spending and the flop to suit the Chinese on the AIIB [the Asian Infrastructure Investment Bank]—it all feeds a narrative that this is turning into little England from Great Britain,” said Posen. “And Little England is of very little consequences to the Americans.”
Britain’s decision to join the AIIB, a $50bn organisation headed by the Chinese that will make investments in the Asia Pacific region and which is regarded as a rival to the World Bank, drew criticism from Washington. George Osborne, who has encouraged Chinese investment in UK infrastructure, especially in nuclear energy, has made it clear that he wants to attract more Chinese investment to Britain, and to make Britain the leading centre outside China for trading in Chinese currency, the Renminbi.
“I think it’s a perfectly fine tactic and goal [to make London the centre of Renminbi trading],” said Posen. “It’s not a sufficiently important goal that it should be spilling over into broader foreign policy choices.”
He also worried that London’s financial sector risks becoming “Britain’s one thing,” adding that “if Scotland is devolved, the city becomes ever more dominant.” The risk, he says, is that London ends up becoming “what people have already started worrying about—but it’s going to come true—which is London is the place where rich people put their apartments.”
There is also a risk that Britain will become even more divided and uneven, with incomes and over-inflated property prices in London and the south-east rising out of all proportion to the rest of the country. “In the long term this is a bad scenario for the UK economy,” said Posen, adding that even a vote in favour of staying in the EU, would still be deeply destabilising. “The Brexit referendum just has to be close, because we’re seeing with Scotland even when they get a close referendum, we see them giving away the store rather than saying ‘you lost’. My concern is the British may turn out to be sensible and vote against Brexit but then the government will do as they did with Scotland.”
The election’s economic context has been troubling—global markets are showing signs of weakness, and government debt and stocks have both suffered sharp falls in prices, in Europe, US and Asia. Janet Yellen, the Federal Reserve Chairman, has indicated that long-term interest rates will now start to rise and Posen agrees that Governments’ borrowing costs will increase. “If borrowing costs don’t rise over the next year from where we are, we are in a hell of a lot deeper trouble than if they do.”
So might this have been a good election to lose? “If nothing was at stake, sure. But the point of contesting elections is not to win the election, it’s to make sure the country’s governed right,” said Posen. “What I’m telling you is that I don’t think the country’s going to be governed right, under these circumstances.”