Planting the seeds of another crisis

 
Allister Heath
FOR some bizarre reason, the creation of three new European Supervisory Authorities and the European Systemic Risk Board – a major power-grab for Brussels – was welcomed last night by Conservative MEPs. Vicky Ford, one of their numbers who took part in the negotiations, admitted that “this is very complex multi-layered legislation and it needs to be checked by legal experts over the coming days” but nevertheless called for it to be “put into action.” Regrettably, it almost certainly will be, even though even its supporters aren’t fully au fait with the fine print. Far from being a good thing, the new regulatory regime will turn out to be yet another blow to Britain’s competitiveness, costing jobs and tax receipts.

We should never forget how important the City is to Britain. Tim Congdon, the economist who runs International Monetary Research, has crunched the numbers. Exports of financial services increased from 0.5 per cent of GDP in 1970 to 3.5 per cent of GDP in 2009, despite the collapse that year in the sector’s output. The rise in financial exports roughly matches the increases in finance’s share of GDP; in other words, virtually all of the growth in finance since 1970 has been exported. A somewhat wider definition of financial services which embraces insurance and half of other business services (such as legal and accountancy work and some IT) – implies than exports of what Congdon terms ‘”the financial complex” as a whole are about 6-7 per cent of UK GDP – and an extraordinarily important 20 per cent of total exports of goods and services.

With manufacturing – the traditional source of exports – in long-term decline, the City is thus vitally important to Britain’s ability to pay its way in the world; undermining the sector (as opposed to reforming it to make it more sustainable and less prone to busts) would be a terrible mistake. Yet that is exactly what this latest transfer of powers to the EU will do. There is no need for it: reforms can all be implemented by national regulators; ditto with changes to monetary policy.

One of the big unheeded lessons of the crisis is that it is dangerous for all countries to pursue similar policies: there is nothing worse than everybody getting it wrong at the same time. The international Basel accords on capital adequacy turned out to be disastrously misguided and helped propagate the recession globally; the same is true of international accounting standards that forced inappropriate mark-to-market pricing of securities around the world. Central banks, fixated on consumer price inflation rather than on the money supply or the quantity of credit, encouraged asset price bubbles which almost took the world economy down with them when they finally went pop. Countries even took to slashing interest rates in tandem. Groupthink breeds uniformity; uniformity inevitably leads to stupidity.

My argument is the very opposite to that which is now made almost universally by politicians and pundits – they claim we need a single, coordinated, harmonised set of policies in response to the crisis. But proponents of the received wisdom are merely planting the seeds of an even greater fall the next time around. Regulatory competition and experimentation between nations is a good thing; it serves as a process of discovery and needs to be encouraged, not killed off. The EU, of course, has never understood this – but the rest of us forget it at our peril.

allister.heath@cityam.com