David Cameron arrives for an EU summit in Brussels on 18th March, 2016. Kaletsky argues "Cameron’s Brexit gamble is far worse than the pound’s plunge so far" ©Geoffroy Van der Hasselt/AP/Press Association Images
One of the mysteries of the Brexit referendum campaign has been the invisibility of Labour politicians in the pro-European Union camp. Why have aspiring Labour leaders such as Andy Burnham, Liz Kendall or Tristram Hunt not jumped at the chance to raise their political profiles by campaigning against Brexit? Any new generation Labour politician who campaigned against Brexit, while attacking David Cameron as a venal and irresponsible Prime Minister whose pandering to Tory extremists has threatened Britain with economic disaster, would be facing an open goal.
David Cameron could not defend himself against the charge of irresponsibility, since his own campaign will have to acknowledge the risks of Brexit as the referendum draws closer. Secondly, the Prime Minister could not compete with a Labour voice in warning against the dangers of Brexit, since he was responsible for needlessly exposing the country to these risks. Thirdly, Jeremy Corbyn would be no match for a new-generation Labour politician in advocating the EU cause, since he probably supports Brexit. Corbyn is also in hock to the ageing Old Labour militants who view the EU as a capitalist conspiracy, whereas Labour’s only hope of revival is to energise a new generation of young, cosmopolitan, pro-EU voters.
For evidence of the potential catastrophe created by Cameron, ambitious young Labour politicians should look at financial markets, specifically the only financial market to have repeatedly changed the course of British politics. This is the currency market, where the pound has collapsed since the referendum announcement to the rock-bottom it only hit briefly during the 2008 financial crisis. The pound has only traded at or below $1.40 for four short periods in history: the two months in early 2009 when every bank in Britain was failing; the weeks following the 9/11 attacks; the period after the pound’s “Black Wednesday” collapse in 1992; and the miners’ strike of 1984-85. By this measure Cameron has done as much damage as the pantomime villains of British financial history: Arthur Scargill and George Soros—not to mention Gordon Brown.
Brexiteers and apparent financial sophisticates might respond that a weak currency is not necessarily a sign of economic weakness. A falling pound is helpful to British manufacturers and exporters. (For full disclosure, let me note that I partly own a company whose income is in dollars and I therefore benefit from a falling pound.)
But the gains to exporters from a falling currency have never cut much ice with voters, and the Tory press would have eviscerated any Labour prime minister who allowed sterling to collapse, as Cameron has.
More importantly, a genuinely sophisticated analysis of financial markets shows the true consequences of Cameron’s Brexit gamble to be far worse than the pound’s plunge so far. This analysis depends on two observations that are obvious to financial traders but not yet to politicians or voters. The first is that for the past 30 years, the pound has normally traded within a band of 10 cents above or below the long-term average of $1.65. The pound has shown a stronger tendency than other currencies to revert to its long-term average against the dollar, probably because the US and Britain have similar economic structures and monetary regimes.
The second key point is that the pound has fallen out of its normal trading band of $1.55 to $1.75 not in response to an actual Brexit vote, but on the off-chance that this event could happen. Since the polls are mistrusted by investors after last year’s general election, bookmakers and spread-betting markets are seen as a better guide—and these consistently show “remain” to be twice as likely a result as “leave.”
Combining these observations allows us to infer what could happen to sterling if Britain votes for Brexit. A “remain” win would presumably mean the pound returning to the $1.55 to $1.75 range, which is where it broadly traded for the five years before the 2015 election and the Brexit vote. Thus a “remain” vote would probably produce a profit of 10 per cent or more for sterling investors. But if “remain” has twice the probability of “leave,” the devaluation after a leave vote must be double the expected gain from remain. The implication is that a vote to “leave” would produce a further devaluation of at least 20 per cent. That would push it down to $1.10, the lowest-ever level apart from at the worst point of the 1984-85 miners’ strike. A pound at $1.10 would be worth less than one euro.
In other words, the present pricing in currency markets implies that Brexit would inflict unparalleled damage on Britain’s economy—worse than trade union militancy or the 2008 banking collapse. This is indeed a strong possibility, and if voters can be made to understand the dangers of a post-Brexit financial catastrophe then the chances of a Brexit vote will rapidly diminish, as discussed in my article last month on “Project Fear.”
Which brings me back to the opportunity for financially sophisticated, aspiring Labour leaders. They can explain the message of financial markets more clearly and objectively than the squabbling Tories. By doing this, the party could begin to erase its reputation for financial incompetence, earned after the 2008 crisis, and pin a narrative of currency mismanagement on Cameron, like the one that destroyed John Major after 1992.
If Brexit actually happens and results in an economic crisis, an unequivocally pro-EU Labour politician who warned of this disaster would be ideally placed to pick up the pieces from the crumbling Tories. If, on the other hand, voters draw back from the brink and support “remain,” this politician would become the automatic front-runner to replace Corbyn. And what if Brexit happens and proves a triumph? In that unlikely event, the Tories will be in power for a generation anyway.
In short, any young Labour politician who can rise to prominence by fighting Brexit will not just serve the country, but also his or her own career. What are they waiting for?
