27 January 2013

Simon Nixon: Two ways to look at sovereignty issue

Writing in the WSJ, Nixon says that at the heart of both David Cameron's and Mervyn King's speeches last week were those timeless questions: Where should power reside? And to whom should it be accountable?

It's no coincidence that questions of sovereignty have risen to the top of the agenda at a time of economic anxiety. Politics is famously the distribution of scarce resources. Yet faced with the deepest slump since the Great Depression, politicians in many advanced economies feel powerless: they have discovered that many of the most powerful tools to alter the distribution of resources—power over interest rates, exchange rates, trade and fiscal policy, and the banking system—are placed beyond their reach.

Many politicians would now like some of these powers back. Mr Cameron rightly argues that EU regulations are often overly-prescriptive and that, by extending into areas such as employment rules not strictly necessary for the maintenance of a single market, have become a growth-sapping burden on European business. Until now, British leaders have taken the view that a few irksome rules are the price one pays for the right to help shape the rules for everyone else. They've also concluded the best way to seek changes to the rules is to build alliances with the EU. But Mr Cameron has chosen instead to issue an ultimatum: he wants powers repatriated to the UK and if his demands are not met by 2017 he has implicitly threatened to lead a referendum to take the UK out of the EU...

Mr King's speech contained similar warnings for the government with respect to inflation. His intervention comes at a time when the UK economy has flat-lined for three years and amid speculation that the Treasury is considering a change to the BOE's inflation target. Mr King reiterated his belief that all that any central bank can deliver over the long term is price stability and that since monetary policy can only bring forward future spending, it is subject to the law of diminishing returns. His message was that experience has shown that inflation targets are the best way to deliver price stability and—implicitly—that governments mess with this mandate at their peril.

But it is a sign of how far the political ground has shifted that Mr King also suggested governments could be more explicit in specifying the time over which high inflation be bought back to target. That he is prepared to contemplate such a significant weakening of the concept of price stability suggests that Mr King fears politicians are already well on their way to "repatriating" control over monetary policy...

Mr King's comments are a belated—and possibly futile—warning that rather than try to reclaim powers that experience has led society to put beyond their reach, politicians should make use of the immense powers that they already possess.

Full article

Speech by David Cameron

Speech by Mervyn King

© Wall Street Journal