Don't Panic Over 'Brexit,' Former Bank Of England Governor Says
RAY SUAREZ, HOST:
When the United Kingdom voted to leave the European Union, the markets reacted quickly and badly. Three trillion dollars in value was wiped off the global markets, and the British pound suffered its biggest one-day selloff in history. The fallout prompted the Bank of England Governor Mark Carney to suggest Thursday that new stimulus measures in the form of interest rate cuts would be needed later this summer.
But one former governor of the Bank of England says there's no reason to panic. Lord Mervyn King shepherded the United Kingdom's financial system through the financial crisis and recession during his 10 years on the job. We reached him in London, and I asked whether a recession is now possible for the U.K.
MERVYN KING: We don't know. Certainly I think some slowdown is likely as investment is put on hold given the enormous uncertainty that we face. But you can already see there's been some recovery in the last couple of days in stock prices and the exchange rate. Markets will move around, I'm sure, for some days or weeks as they try to work out the new level.
Well, I think the assignment now is to make sure that any uncertainty doesn't create fragility in the banking system and the Bank of England has done a great deal to ensure the banking system is safer, it can provide a very large amount of liquidity to the system if there is sign of instability and central banks around the world are working extremely closely together.
SUAREZ: One economist writing for the BBC pointed out that between the lowering of the credit rating by Moody's and Standard and Poor's, the loss of the value of sterling, there's already been backlash that can be valued at amount that exceeds the cost of Britain's annual contribution to the EU.
KING: We're not sure if these numbers make sense in terms of comparisons. After all, the reason why you might be worried about a down rating of the U.K. government's credit is that the interest rate the government had to pay to borrow would go up. Actually what's happened in the last few days that it's gone down. So I think there's a great deal of fuss being made and the only stance is we do not know what the long-run consequences will be.
And we have found a great difficulty in anticipating what the short-run consequences would be. The right response to that is not to panic or declare the end of the world, but to wait and see and to handle the problems as they arise. That is what the Bank of England I'm quite confident will do, and it's now what the Treasury need to set their mind to in terms of creating a framework for determining the stance that the U.K. will take towards trade negotiations around the world.
SUAREZ: Well, you've predicted that in 25 years' time, we'll look back and say, the dire predictions of economic collapse after the Brexit were much ado about nothing. But what's in store for your country in the next 25 years outside the EU?
KING: Well, a great deal is we're the fifth-largest economy in the world. We don't honestly know what the long-run effects will be, but the idea that somehow the future of Britain is obviously so much better inside the European Union seems to me very peculiar.
The European Union faces now two existential problems - one is the future of the euro area and the other is migration from outside the EU into the European Union. Neither of these problems seem to be amenable to the solutions that have been tried. But the European Union itself does face these enormous challenges and the shape of the European Union could well change quite significantly over the next five years.
SUAREZ: There are very few British constitutional experts on this side of the Atlantic, so I'm going to ask you what may seem like a simple and straightforward question, but it's one that I'm curious about. As a peer, as a member of the House of Lords is there still a role, are you still in the arena for shepherding the whole process forward as Britain contemplates the manner in which it departs the EU?
KING: Well, I think what matters now is that politicians on all sides - I'm not a politician - but the politicians we have need to come together now and shape a path for Britain in terms of the negotiations over trade. I'm sure that can be done.
But the trouble is the politicians are present - are totally absorbed in the leadership crises in both our major parties. And if there's been any sign of overreaction, it has been within our political class and among the politicians.
And what I hope is that politicians will try to find a way of being less distracted by what's going on within their parties and focus together with the civil service and the Bank of England on the measures that we need to devise to take our trade negotiations forward.
RAY SUAREZ, HOST:
That was Lord Mervyn King. He served as the U.K. central banker, the governor of the Bank of England for a decade. His new book is "The End Of Alchemy: Money, Banking And The Future Of The Global Economy." He joined us from the BBC studios in London. Transcript provided by NPR, Copyright NPR.