At last, the troubled question of how much central bank independence is desirable receives sensible political analysis.
Ed Balls, Strictly speaking, isn’t a politician these days. But the former shadow chancellor knows a thing or two about such matters, having been an architect of the Bank of England’s independence in 1997, and his nuanced take puts the crude populism of the likes of Michael Gove and William Hague to shame.
Unlike them, Balls acknowledges the bleedin’ obvious: that the Bank did a decent job of preventing the post-banking crisis recession turning into a depression. That record is why, incidentally, the Bank’s governor, Mark Carney, is entitled to grumble about politicians engaging in a “massive blame-deflection exercise”.
Monetary activism was endorsed by the government of the day. If politicians don’t like the “bad side effects”, as Theresa May calls them, of low interest rates, they are allowed to take off-setting measures. They use taxation to address inequality; or they could do pension funds a favour by addressing the distortions caused by the mad system for calculating deficits.
But Balls is correct to say that the Bank has accumulated massive powers since the crisis and that its actions now routinely take it into territory traditionally regarded as political. Only this week, for example, Threadneedle Street gained the right, more or less, to close down the buy-to-let lending market if it spies risks in the system.
That notion would have been regarded as far-fetched back in 1997. It flowed from George Osborne’s action in 2010 to return full responsibility for financial stability to the Bank. Theadneedle Street, arguably, is now more powerful than at any time in its 300-year history. Has political accountability kept pace? Probably not, which is Balls’ point.
His big idea is that an extra layer of oversight is required – “a systemic risk body chaired by the chancellor” to oversee the whole system. The fine details probably require some work but the idea is worth debating: the Bank would still have operational independence to set interest rates but the government would keep a closer eye on the mandate.
A useful side effect might be an end to the sillier Bank-bashing. Hague, for example, jumped straight from his dislike of low interest rates to issuing an apocalyptic warning that unless central banks changed course “the era of their much-vaunted independence will come, possibly quite dramatically, to its end”.
Let’s hope not: central bank independence has served the UK well. But there is a fair argument that independence is best protected by ensuring the Bank’s enormous powers have greater checks and balances. Give Balls’ idea 7 out of 10: needs more polish, but an engaging contribution.
EDF’s home troubles don’t instil confidence
In EDF we trust, said the government in effect when it gave a thumbs-up to Hinkley Point C, the nuclear plant that will supposedly one day supply 7% of our electricity. But have ministers had a look at the current chaos in EDF’s home market of France?
EDF has issued two profit warnings in three months, prompted by an order by the French nuclear safety regulator that tests be conducted on 18 of the company’s 58 reactors. Some of those reactors have returned to service but not enough for EDF to meet its output targets. Thus French power prices have soared. Power has even been flowing to France from the UK through the giant interconnector at times. The direction, set by where wholesale prices are higher, is normally the other way.
That is one reason why the UK wholesale price of electricity for this winter is massively higher than the forward price for next winter – about £80 a megawatt hour versus £50. There is no reason to doubt National Grid’s assurance that supplies are sufficient for this winter, but the price signal is unmistakable: the market is nervous.
As Peter Atherton of energy consultant Cornwall explains it, the UK system is traditionally designed to cope with eight or nine things going wrong simultaneously, but three or four might be tricky today. “We are now seeing a significant risk premium in the wholesale price as reserve margins have got tighter,” he says. “It hasn’t happened in the past but it is happening now.”
Not all the blame for the spike in UK wholesale prices can be laid at EDF’s door. And maybe all its French reactors will be signed off as safe in the new year. But one worry about Hinkley is more acute than ever: EDF looks over-stretched at home and in no position to attempt a big UK adventure.
