The British economic debate is bewildering, marooned in a discourse in which the pivotal economic fact of 2022 is ignored. The chancellor and governor of the Bank of England will talk about the dangers of inflation, of the risk of a wage price spiral and the need for pay restraint – but never about the escalating sterling crisis and what lies behind it. Nor will the opposition lay into them for their vows of silence – equally anxious to avoid mentioning the dread word or its baleful economic impact.
But Brexit is not going away. It cannot be avoided. Last week, we learned that in the first three months of this year Britain’s current account deficit was the worst since records began in 1955. It stood at a stunning 8.3% of GDP – the kind of deficit recorded by banana republics before they collapse into slump, banking crises and hyperinflation.
The figures are so terrifyingly bad that even a shaken Office for National Statistics cautions that it is uncertain about the quality of its own data. But the core reality cannot be dodged and revisions will impact only at the margins rather than reverse the story: real export volumes over the period are down 4.4% and import volumes up a gigantic 10.4%.
The apologists point to exploding energy costs, statistical vagaries, the ongoing distortions of Covid, weak world markets, supply chain effects. What cannot be mentioned is Brexit and the obvious depressive impact it is having on UK exports and inward investment flows. The refusal of the governor of the Bank of England, Andrew Bailey, even to acknowledge what is happening and why is beginning to be a source of lack of market confidence in itself. Independence was to give the Bank a voice, not to be the government’s ever loyal dupe. The foreign exchange markets are increasingly shaken: sterling was once again weak, slipping below $1.20 on Friday, against $1.31 three months earlier. Britain is entering dangerous territory – the economy is falling into recession, investment is flat, while inflation, high across the industrialised world because of the fallout from the war in Ukraine, is highest in the UK largely because of the weak pound, which has no support from any quarter.
Without full access to the EU single market and customs union – our largest market – there is no possibility of an export recovery, nor a recovery in inward investment, nor a lifting of economic confidence. As the Bank of America warns, Britain faces an existential sterling crisis, made worse because of the refusal of the government and many economic commentators to look the truth in the eye.
The eerie parallel is the 1976 sterling crisis, triggered by the conviction of the foreign exchange markets that already very high inflation was certain to get out of hand. There was nothing to prop up a falling pound, given the current account deficit was running at what seemed an unimaginable 4% of GDP – half today’s deficit.
The pound could not be steadied without buying time from the IMF with an enormous credit line. The government would then launch a package of tough spending cuts as the quid pro quo for the loan, fiercely resisted by the Labour left’s leaders Michael Foot and Tony Benn, which would simultaneously shrink the economy and thus the current account deficit. A floor would be put under sterling and therefore curb inflation, aided and abetted by a pay and incomes policy. The prime minister, James Callaghan, famously told a sullen Labour party conference that no other option existed, opening up irreconcilable arguments between its ultra left and social democratic wings that have plagued Labour ever since. But at least the UK was embedded in a network of strong trading relationships. Having just joined the Common Market, it could trade its way back to international creditworthiness, with North Sea oil soon reinforcing the impetus.
The task today is less fiscal belt-tightening and raising interest rates, although both may be forced upon us as sterling’s fall accelerates: it is fully to reopen access to our largest market, the EU, to offer some prospect of export growth and inward investment. The strong economic performance that Northern Ireland is now experiencing within the single market needs to be reproduced across the kingdom.
A Tory prime minister, echoing Callaghan, is going to have to tell a sullen Tory party conference within the next couple of years that no other option exists – that the alternative is ongoing high inflation, high interest rates, a property crash and economic stagnation. Impossible? Devaluing the pound inside the ERM or being forced out altogether seemed impossible in 1991 before it happened in 1992. Having to bail out the banking system seemed impossible in 2007 before it happened in 2008. The same inexorable forces are at work today and the consequent rows between the Tories’ pragmatic and its Brexit ultra wings will plague it for a generation too.
It was sad to see Tony Blair, trying to fashion a new political centre ground, insisting last week that the arguments over the EU are over. Brexit is done – it won’t be overturned for at least a generation, he said. It is not done. Radical centrism is not to identify what the centre right think and then to do it more nicely and more moderately, as the swarm of pollsters around him and the leader of the opposition’s office seem to think. It is doing the right thing well and with conviction, around which the centre will coalesce.
Britain needs to be in the single market and customs union to have any prospect of price stability and growth. It needs to be within the political architecture of Europe for its own security, given the dark menace of Russia. And it needs to be within both to have any chance of holding Northern Ireland and Scotland in the union.
The British economic and political ship is foundering, damaged by the rock of Brexit; its captains need to be called out for their errant seamanship. A fundamental change of course is an imperative. The future political stars in both the Labour and Conservative parties are those with the courage to say so.
• Will Hutton is an Observer columnist
