Nobody would have expected the memoirs of Alistair Darling to be very exciting. Anyone whose most interesting feature is their eyebrows, and who spent most of their career as Gordon Brown’s henchman, can’t expect to have much of a claim on the public’s attention.
A lowish print run was probably the best that the publishers expected. Yet, rather surprisingly, the advance leaks of Darling’s memoir, Back From The Brink have proved to be surprisingly interesting. Aside from yet more revelations of Brown’s oddness and bad temper – and we needed confirmation of that about as much as we need proof that the Thames is a big river that flows through London – we have learned that, at one stage as chancellor, Darling came close to sacking the Bank of England governor, Mervyn King.
Darling’s memoirs make it plain there was little love lost between the two most important actors in British economic policy in the crucial years between the financial crash of 2008 and the final demise of the Brown government in 2010. Darling describes King as “amazingly stubborn and exasperating”. When his term as governor came up for renewal, Darling reveals that the government gave serious thought to handing him his P45 and getting someone more pliant to do the job.
In the end, the Brown government gave King his second term – and was rewarded with a series of thinly veiled attacks on its spending plans. By the time the decision was made, however, the government was already so weak, and the British economy had so little credibility left in the global markets, that it almost certainly didn’t feel strong enough to show King the door. If it had done so, the pound might well have crashed and the gilts market faced the kind of sell-off that forced the Greek government into the arms of theInternational Monetary Fund. Between them, Brown and Darling had little realistic choice but to give King his second term, however much hostility might have been growing between them.
The clash of personalities is entertaining enough. What is more interesting, however, is what it reveals about the fault-line that runs straight through the heart of British economic policymaking. An independent Bank of England is a novelty in Britain. It splits power between two separate offices, which are meant to be independent of each other. The chancellor controls fiscal policy. The governor, along with the Monetary Policy Committee (MPC), controls interest rates. The first decade after this policy was put in place was straightforward enough. But the economic climate was then, as King himself has frequently pointed out, exceptionally benign. Inflation was low, credit was easy, and growth was strong. It is not hard for everyone to get along when everything is going that well.
It was after the financial crash that the conflicts started to emerge. Looking forward, there could well be a lot more potential rows ahead. What happens, for example, if the governor and the MPCdecide they need to hike interest rates in the run-up to a general election if they are to keep inflation under control? It is hard to see that going down well with George Osborne, or whoever happens to be chancellor in 2015 or 2020. Likewise, what happens if the economy goes into a double-dip recession? The chancellor might well want to see more quantitative easing to try and find some way of stimulating growth. But the governor may well consider that the risks of inflation, or of a collapse of confidence in sterling, are too great. Or what if the chancellor decides the budget deficit can be let rip in the run-up to an election – a move the governor may find very worrying? Is he allowed to raise interest rates in response?
In some countries, the central bank is so strong you wouldn’t have any doubt about who would come out on top. Prior to the launch of the euro, the Bundesbank in Germany could brush aside the views of mere politicians as nothing more than an irritation. In the US, the Federal Reserve has usually occupied a similar position, although that may be starting to change. Alan Greenspan in his pomp couldn’t be challenged by anyone. His successor, Ben Bernanke, doesn’t look nearly so powerful. Elsewhere, central bankers are not so mighty. The Banque of France never had the same status as the Bundesbank in Germany. The European Central Bank doesn’t look to either. It has made it pretty clear it doesn’t want to buy the debt of the peripheral euro-zone economies. But its political masters have left it with little choice.
As a general rule, central banks have to bow to the politicians. Can King or any of his successors buck that trend? Probably not. The Bank doesn’t have much of a public profile. Its record on inflation has been fairly poor. Nor did it do a great job of controlling the bubble that led up to the financial crash of 2008. If it came down to a fight with the chancellor, it is hard to see many people manning its barricades. We haven’t seen a really big public row yet between Downing Street and Threadneedle Street. But Darling has revealed the tensions behind the scenes. We are certain to see a public fight eventually – and quite possibly in 2013 or 2014. And you certainly wouldn’t want to bet on the Bank coming out ahead.