Former UK chancellor Darling discusses Brexit and limits of QE at IE Hamburg Summit

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Former UK chancellor of the exchequer Alistair Darling said June’s referendum on whether Britain should remain in the EU had not been a “referendum on the EU as such, but an expression of people who felt marginalised – which is why a mere treaty change won’t be enough” to replace Britain’s EU membership.

Darling made his comments in an address to delegates attending a two-day event held in Hamburg in October by International Investment’s sister publication, Investment Europe.

In a wide-ranging talk, Darling, who had served as a chancellor during the 2008 financial crisis, portrayed Britain’s decision to leave the EU as an one of the effects of that crisis.

Pointing to the persistence of economic inequalities between rural and urban parts of the UK, and the fact that working-class voters and those living in deprived rural and urban areas were most likely to vote to leave, Darlin said: “The banking crisis, which was subsequently followed by an economic crisis, is still a key reason for uncertainty today”.

While immigration was a central theme of the pre-vote Brexit debate, Darling said he personally regarded inward migration to be an overall beneficial factor for all of Europe’s economies. “But this is difficult to sell to people who have missed out on the benefits of economic growth,” he conceded.

Article 50 delay

Darling said he backed a delay in the triggering of Article 50, the formal legal mechanism for leaving the EU, but also criticised the fact that the prime minister, Theresa May, had yet to express a sufficiently clear stance on how the UK should and would exit the bloc.

“We ought to sustain membership of the single market,” he said.

“Everyone has got access, but maintaining membership and being part of the customs union will be vital.”

Darling went on to defend the UK Government’s response to the financial crisis as it unfolded in 2008, arguing that policymakers were right to choose to bail out such key financial institutions as RBS. Had they not, he said, the entire European banking sector would have been at risk of a systemic failure.

When quizzed by the audience as to what extent this experience was pertinent, given the recent challenges faced by lenders such as Deutsche Bank and Commerzbank, Darling responded with what might have been a hint to German chancellor Angela Merkel, by saying that any government that would allow as major a banking institution as Deutsche Bank collapse would have to be very clear about the consequences for the overall health of the European banking sector.

‘Too big to fail’

He went on to stress that given Europe’s current economic climate, with Britain poised to exit the EU and other geopolitical and economic stresses at play, the whole idea of certain institutions being “too big to fail” and others supposedly not was irrelevant. “In times of uncertainty, every lender becomes ‘too big to fail’, because their default will affect other lenders,” he said. “We are living in uncertain times.”

At one point during his remarks, Darling was challenged by an Icelandic member of the audience as to whether, in 2008 – when he was UK chancellor, and the financial crisis was unfolding – he felt that the British government’s use of anti-terror legislation to protect British savings in Iceland’s failed Landesbanki was justified.

Darling admitted that the use of the anti-terror legislation was not the appropriate legal course of action, but claimed that it was the only legal option available at the time for protecting the savings of British citizens held by Landsbanki.

2008 crisis

Commenting on the lasting impact of the 2008 crisis, Darling criticised the current state of monetary policy.

While he backed the necessity of quantitative easing (QE) as an immediate response to the 2008 crisis, he questioned its viability as a policy tool today.

“QE was a deliberate shock therapy, but it is not viable to instill confidence seven years later, and introducing negative rates will only reinforce doubts about the health of the economy” he warned.

“The situation we got ourselves into is that people seem to think that monetary policy is the only tool available, but we’ve got to look at fiscal policy too.”

Given historically low borrowing costs, he suggested that an increase on the part of  Government, in order to finance infrastructure investments, might be a better option.