Bank of England independence kept UK out of the euro, says former Treasury adviser

By on 04/05/2017 | Updated on 24/09/2020
Ed Balls, former chief economic adviser to the Treasury

The UK would have joined the euro before crashing out of the single currency five years ago had the Bank of England not been given its independence in 1997, according to former chief economic adviser to the Treasury Ed Balls – who, as the closest special adviser to then-chancellor Gordon Brown, played a key role in the decision of Tony Blair’s newly elected Labour government to grant the Bank freedom from ministerial control.

Speaking on Tuesday at a London seminar organised by Kings College London’s Strand Group to mark the 20th anniversary of the Bank’s independence, Balls sketched out an alternative reality – envisaging how events could have played out had the Bank remained dominated by the Treasury.

“There would have been a big row over interest rates, there would have been a big problem probably between No 10 [the prime minister] and No 11 [the chancellor], somebody would have been sacked, and there would have been a lack of confidence in the monetary regime,” he told the audience.

“People would have said the only solution was to sign up with our European partners,” he said, arguing that the Confederation of British Industry and the Trades Union Council “would all have said – as happened in 1925 [with the reintroduction of the gold standard] and then in 1990 up to 1992 – that joining the single currency is the only salvation because Britain just can’t manage its own affairs.

“We would have joined the euro, there would then have been a global financial crisis, and we would have crashed out in a Greece-on-steroids kind of way. We wouldn’t have even bothered with a referendum, and we would have left the European Union at least five years ago.”

The event revisited the historic decision to grant the British central bank its independence. Along with Balls – who was Brown’s key adviser 1997-2004, before winning a parliamentary seat and serving as education secretary and shadow chancellor – the speakers included former Treasury permanent secretary Lord Macpherson and the current Bank of England governor Mark Carney.

Speakers explored the reasons for the independence decision and the role of the bank today, agreeing that a remarkable cross-party consensus on independence emerged in subsequent years despite early misgivings about a step that at the time was considered controversial.

Questions about Bank of England’s independence have been raised since last year, against the backdrop of tensions between Brexit campaigners and Mark Carney over economic projections and monetary policy.

At the Conservative Party conference in October, prime minister Theresa May said in her keynote speech that low interest rates were increasing inequality across the country, prompting Carney to rebuff the claims and the Treasury Select Committee to launch an inquiry into the risks of politicians putting “undue pressure” on the bank.

Balls, who is now a visiting professor at Kings College London, argued recently that while the case for operational independence at the Bank of England remains strong, the new powers it has acquired since the financial crisis of 2007–08 require a new framework to reconcile that autonomy greater accountability and enhanced “macro-prudential” supervision – which aims to mitigate systemic risks in the financial system.

A fuller report on the event will appear on Global Government Forum within the next few days.

About Gavin O’Toole

Gavin O’Toole is a freelance writer and editor in London. He has written for leading newspapers, magazines, wire services and business schools about financial markets, business and regulation around the world. He has a particular interest in international relations, and a specialism in Latin American affairs. He has conducted research on this region’s political economy and has also published a number of books about its politics and natural environment. His latest title, Environmental Security in Latin America, will be published by Routledge in September 2017.

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