The U.K. Shouldn't Play Confidence Games
One of the few bright spots for international investors following the U.K.'s June vote to quit the European Union was the swift establishment of political stability. David Cameron's decision to fall on his sword threatened a divisive battle for control of the ruling Conservative government; instead, Theresa May emerged unchallenged and triumphant as her rivals dropped away.
That stability, though, remains far too fragile for the prime minister to play fast and loose with it.
May has "full confidence" in Chancellor of the Exchequer Philip Hammond, her spokeswoman Helen Bower said on Monday. She's also "clear in her support" for Bank of England Governor Mark Carney and respects the independence of the institution he leads, Bower told reporters. That sounds uncomfortably like the owner of a sports team backing the coach rather too resolutely to ring completely true.
The comment about Hammond comes after British newspapers reported that the pro-European minister is clashing with his cabinet colleagues. The need to voice support for Carney came after May said earlier this month that the "bad side effects" of record-low interest rates meant "a change has got to come and we are going to deliver it."
In the febrile post-Brexit climate, even the slightest hint that May has less than total faith in the two people directly responsible for Britain's fiscal and monetary policies is dangerous. It risks scaring away overseas money by undermining what remaining faith foreign investors have in the U.K. as a place to do business. A selection of Monday morning headlines illustrates just how feverish the atmosphere is:
- U.K. Banks Seen Moving Some Ops to Frankfurt in 2H 2017: Reuters
- A Weaker Pound Won't Help the U.K. Economy, Deutsche Bank Says
- Swiss Immigration Fig Leaf Won't Sate Hard-Brexit Believers
- SocGen Said to Put Planned Internal London Transfers on Hold: FT
- U.K. Out of Top Five Investment Sites Post Brexit, EY Says
- Time to Give Up on a Late Surge in Brexit-Trodden IPOs: Gadfly
Arguments rage about whether the 18 percent collapse in the pound since the Brexit referendum is economically welcome (it should boost exports) or financially disastrous (it will stoke inflation and prompt higher interest rates). But the undeniable truth is that both the U.K. currency and its bond market are taking a beating this month:
Imagine how much worse those sell-offs might get if investors interpret May's vote of confidence in her two most senior economic officials -- one of whom is her neighbor on Downing Street -- as signaling the opposite. Rupert Harrison, a former U.K. Treasury official who's now the chief macro strategist at BlackRock, said on Twitter that the "significance is not the answers, but the fact the questions are being asked. Main lesson is that close coordination between No. 10 and No. 11 is a requirement for effective government in the U.K., not an optional extra."
So far, the economic data have betrayed the doomsayers who predicted that U.K. growth and investment would fall off a cliff if the nation chose to quit the EU. But it's still early days, and there are months and years of divorce negotiations to get through. The last thing the U.K. needs is political instability. May needs to tread carefully, lest her chancellor or her central bank governor decide that they, too, would be better off exiting.
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