For more than seven decades, the convulsions of British politics were marked by sterling crises. The second Labour government fell apart in 1931 when Ramsay MacDonald cut unemployment benefit to try to keep sterling in the Gold Standard. British postwar foreign policy crumbled when sterling crises ended military action against Egypt in 1956 and later forced a withdrawal from East of Suez. James Callaghan ended the postwar commitment to full employment after his government was forced to seek an IMF loan in 1976 to compensate for sterling’s collapse. Black Wednesday in September 1992 terminated more than a decade of Conservative electoral hegemony and any hope that Britain would turn its Maastricht opt-out on monetary union into an opt-in. That monetary fault line went on to play a crucial part in wrecking Britain’s European Union membership.
Although Conservative governments suffered their fair share of sterling-induced political crises, Labour was structurally disadvantaged by the perpetual risk of a currency run. The fear that investors would take fright made it harder for Labour to present itself as a party of competent government. Indeed, New Labour’s repudiation of the past was directed, as much as anything else, at the financial markets, reassuring them that a chastened Labour leadership now understood the constraints markets created better than the Conservatives. George Osborne’s tactical success in 2010 was to disrupt this New Labour narrative by using Gordon Brown’s fiscal record and the financial and eurozone crises to resurrect that old fear within the bond markets.
But the monetary environment around the 2010 general election has vanished. Greece, whose fate Osborne used to attack Labour, now enjoys an interest rate for ten-year bonds of not much more than 1 per cent. Attempts by central banks to steer the world economy back to anything remotely like monetary normalcy have failed. The Federal Reserve has cut rates three times since July and returned to a form of quantitative easing, even though in July the American economy’s recovery from its last recession became the longest in history. The Bank of England started talking in early 2014 about the economy returning to normal, but at 0.75 per cent the bank rate now stands but one quarter of a percentage point higher than it then did.
Despite having fallen around 15 per cent since the Brexit referendum, sterling has never since 23 June 2016 created an atmosphere of crisis comparable to the past. A parliament that refused for months to pass a withdrawal treaty but lacked the political wherewithal to reject it or revoke Article 50 could not have indulged itself during an age in which financial markets imposed hard, immediate choices.
This new monetary environment disabled the Conservatives’ old advantages over Labour and opened the opportunity within Labour for Corbynism. Jeremy Corbyn won the leadership in 2015 because his opponents, saturated in New Labour culture as they all were, had nothing to say about his ideological attacks on fiscal austerity. Corbyn ended up capturing 40 per cent of the vote in the 2017 general election by rejecting market-induced restraint and by, among other things, promising largesse to university students and their parents on tuition fees.
But since the last election the Corbyn project has become much more ambitious. The Green New Deal is now Labour’s policy centrepiece. It relies on gargantuan borrowing and has become an existential justification for shedding any remnant of the idea that a government’s creditworthiness should constrain what politically can be achieved.
Concentrating on the climate emergency represents an attempt to entrench economic radicalism within the party. John McDonnell, the shadow chancellor, appears to be hoping it will also open up a line of defence against Conservative attacks on Labour’s spending plans by insisting that the Conservatives’ response to the environmental crisis is hopelessly insufficient.
The Conservatives have adjusted more cautiously to the new monetary landscape. Former chancellor Philip Hammond wanted to remain a fiscal conservative, as if it did not matter that interest rates in Britain and elsewhere are too low to reap any benefit from further deficit cutting. Boris Johnson talks as if he has strategically embraced the monetary moment. He wants to use additional borrowing for infrastructure projects and tax cuts to hold together a political coalition of former Labour voters who support Leave and Tory Remainers. But his chancellor, Sajid Javid, appears more reluctant to concede the political opportunity to attack Labour for fiscal incontinence by making extravagant tax promises.
Beyond Brexit, this general election is being fought over the political parameters of the new monetary world. Labour has raised the stakes inordinately, effectively committing itself to borrowing however much is necessary to prevent an environmental apocalypse, even though there is zero chance that renewable sources can replicate the energy produced by fossil fuels in time to meet the party’s climate-change targets (zero net carbon emissions by 2030).
The Conservatives are trusting that such a millenarian project shows that, however hard it is for politicians to generate a sterling crisis in the present economic circumstances, a Labour government would nonetheless manage to create one.
In this new era central bankers have not told any politician where the fiscal limits for a state with its own currency lie, or how they might manifest. In fact, central bankers may have created a political world that nobody is equipped to understand before the strains become so great that it collapses in crisis.
Helen Thompson is professor of political economy at Cambridge University
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This article appears in the 13 Nov 2019 issue of the New Statesman, How Britain was sold