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Mark Carney and Brexit: A ‘rock star’ and a hard place

Fallout from the EU referendum is unlike any crisis the Bank of England governor has ever faced
Bank of England governor Mark Carney speaks during a news conference at the Bank of England in London, Tuesday, July 5, 2016. Carney says some of the risks predicted to the economy before the referendum on leaving the European Union have begun to crystalize, but that the institution will act to support jobs and growth. (Dylan Martinez/AP)

It’s after 8 a.m. on a sunny Friday in July when Bank of England governor Mark Carney climbs on stage at a downtown Toronto hotel. The topic of today’s sold-out breakfast event, hosted by federal Environment Minister Catherine McKenna and organized by the Toronto Region Board of Trade, is serious business: the risk of climate change sparking a 2008-sized global financial calamity. But Carney, previously Canada’s chief central banker, still manages to squeeze in a friendly game of inside baseball with this familiar and fawning Bay Street crowd. At one point, Carney wheels around in his upholstered chair and flashes a flinty-eyed grin — the same one that earns him comparisons to George Clooney — in the direction of a former colleague sitting in the front row. “Jean-Francois knows all about this,” Carney says of his penchant for tacking points, sub points and sub-sub points onto his lengthy arguments. “It’s part of the privilege of working for me.” Everyone has a good laugh.

On the other side of the pond, things haven’t been nearly so chummy. Last month’s referendum decision to have the United Kingdom exit, or “Brexit” as it’s come to be known, the 28-nation European Union put the Canadian-born Carney in a tough spot. The British pound has sunk to a 30-year low, the country faces a looming recession and a giant question mark hangs over the City of London, the world’s biggest financial centre. Moreover, Carney has been called on to navigate the coming economic crisis at a time when monetary policy looks increasingly impotent, given the Bank’s key interest rate is already near zero, and has been since March 2009. Nor is he getting much help from the Conservative government, which was thrown into disarray following the resignation of prime minister David Cameron, who gambled and lost massively on the country-wide vote. “The U.K. is heading into a situation where politics will be consumed with other things,” says Jacob Kirkegaard, a senior fellow at the Washington-based Peterson Institute for International Economics. “That means negotiating Brexit and navigating issues like immigration instead of shepherding the broader economy and trying to create the conditions for stable, predictable growth.”

Related reading: What to expect as Theresa May starts untangling the UK from the EU 

The U.K., of course, is extremely fortunate to have the “rock star” of the central banking world running its financial system at such a tumultuous time. But it could prove to be a spectacularly thankless job. The British don’t have quite the same love affair with Carney, the first foreign-born governor of the 322-year old Bank of England, as Canadians did when he was running the Bank of Canada. His policies have received far more scrutiny in the U.K., as has his generous pay package. He’s also come under fire, probably unfairly, for seeming to side with Cameron and the Remain side by warning of the economic perils of a Brexit vote. One example of the thoroughly British, though not necessarily polite, rhetoric: Tim Martin, a Leave campaigner who owns a popular chain of pubs, recently called Carney “stupid” during a radio interview, and said the Bank would be better run by Roy Hodgson, the former manager of the English football team — the same bumbling squad that was turfed from the Euro 2016 championships by Iceland.

Carney, the former goalie for his university hockey team, is not one to crumple from a few cheap shots. But his otherwise meteoric career trajectory — he was appointed Bank of Canada governor at age 43 and head of the international Financial Stability Board a few years later — suddenly looks at risk of being mired in an overseas crisis that has much more to do with politics than economics or finance. “Until Brexit, it’s fair to say he made very good progress [modernizing] the Bank and oversaw a fairly stable post-crisis recovery in the U.K.,” Kirkegaard says. “But Brexit represents a totally different type of risk — a risk that’s largely out of his control.”

Carney is so far putting on a brave Brexit face. In the hours after the June 23 votes were tallied, he appeared before TV cameras and offered reassurance the Bank was “well prepared” for whatever might happen next. That included making US$345 billion of additional funds available to banks to ensure they continued making loans. A few days later, Carney delivered a lengthy speech that strongly hinted the Bank’s monetary policy committee (MPC) would lower its trend-setting interest rate, which currently stands at 0.5 per cent. “In my view, and I am not prejudging the views of other independent MPC members, the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer,” Carney said, which most observers that day took to mean at the Bank’s July 14 meeting.

From the archives: The Canadian hired to save the world 

The moves seemed straight out of the central banker handbook. The pound had lost 12 per cent of its value against the U.S. dollar, taking it to its lowest level since 1985, while global stock markets, caught off guard by voters’ surprise decision, had suffered a sell-off worth US$2 trillion. Reassurance was needed. But then July 14 rolled around and the monetary policy committee, Carney included, surprised most everyone by holding rates at their current levels, leading to more market turbulence.

On the surface, the nine-member committee’s near-unanimous decision made sense. By mid-July, barely three weeks after the vote, there was still precious little hard economic data to determine just how deep Brexit had wounded the economy. Plus, Carney only committed to making an “initial assessment” in July. Nevertheless, investors were still thrown for a loop. After all, this was a man with a reputation of moving quickly to stave off trouble, just as he did back in Canada in early 2008 when he guessed, correctly, the Wall Street-centred financial crisis was likely to engulf the world. “His most recent three weeks haven’t been particularly good,” says Michael McMahon, a professor of economics at the University of Warwick in Coventry. “Now not cutting becomes the negative shock — a negative shock that’s entirely of the Bank’s own doing.”

Making matters more complicated for Carney is what’s happened — or possibly hasn’t happened — since. Though the pound has resumed its downward trajectory, the FTSE 100 index, which tracks the shares of the U.K.’s most valuable companies, has not only regained its lost ground, but is now running at an 11-month high. While that could very well be attributed to the Bank’s rapid response to the crisis, it’s also provided ammunition to Leave supporters who argue the Bank’s earlier dire warnings were way off the mark. The same goes for the Bank’s remarks on July 20 that there was “no clear evidence” of an economic slowdown — at least not yet. A few days later, however, a survey of 650 companies across a variety of sectors showed a “dramatic deterioration” in economic activity as firms hedge their bets by shelving plans to hire workers, develop new products or spend on new equipment and factories.

One thing seems clear: the road ahead looks anything but smooth. The U.K. has two years to negotiate its messy EU divorce once it invokes Article 50 of the Lisbon Treaty, which deals with withdrawals from the single market of 500 million people. Though Leave supporters have suggested the country could quickly negotiate a new trade deal, following in the footsteps of Norway, Switzerland or even Canada, there are bound to be fundamental disagreements on hot-button issues like immigration and free movement of people, which are core EU principles. Britain’s jilted former partners are also likely to adopt a tough posture. Take, for example, French President François Hollande’s recent threats to strip the City of London of its multi-trillion-dollar business of handling euro-denominated trades. “It can serve as an example for those who seek the end of Europe,” he said. “It can serve as a lesson.”

Maclean’s Explains: What is Article 50 of the Lisbon Treaty?

Carney, meanwhile, continues to be buffeted by the political winds swirling around London. One of his most frequent tormentors has been Conservative MP Jacob Rees-Mogg, an unflappable euroskeptic with a gift for filibustering who holds the record for the longest word ever uttered in the British House of Commons (floccinaucinihilipilification, defined as the estimation of something as being valueless). During a recent treasury select committee meeting, Rees-Mogg charged that Carney improperly took sides in the vote by suggesting the U.K. would be better off economically by remaining in the EU. “Do you think it’s important that the Bank of England, like Caesar’s wife, should be above suspicion?” asked Rees-Mogg. “Saying the net benefits of European Union membership are greater than the drawbacks — that’s becoming your political opinion.” Carney, however, merely smiled at the rhetorical flourish and then launched into a matter-of-fact defence of the Bank’s pre-referendum commentary, which he said was based strictly on independent economic analysis. Then he abruptly turned the tables: “I think those who cast [the Bank’s work] into question should take a look at their own motivations.”

Mark Carney, Governor of the Bank of England and Chairman of the G20 Financial Stability Board, left, and Angel Gurria, Secretary-General for the Organization for Economic Cooperation and Development (OECD), right, arrive for a press conference for the 1+6 Roundtable on promoting economic growth at the Diaoyutai State Guesthouse in Beijing, Friday, July 22, 2016. The head of the International Monetary Fund called Friday to end uncertainty over Britain's vote to leave the European Union she says is dampening global economic growth. (AP Photo/Mark Schiefelbein)
Mark Carney and Angel Gurria, Secretary-General for the Organization for Economic Cooperation and Development (OECD), right, at the Diaoyutai State Guesthouse in Beijing, July 22, 2016. (Mark Schiefelbein, AP)

That Carney could even be accused of mishandling Brexit no doubt strikes many in this country as preposterous. Still in his early fifties, Carney is viewed in Ottawa and elsewhere as a central-banking wunderkind, with a relatively relatable backstory to boot. He was born in Fort Smith, N.W.T., and raised in Edmonton, the third of four children. He went on to receive degrees from Harvard and Oxford Universities and spent 13 years working at legendary — or, to its critics, notorious — New York investment firm Goldman Sachs. But he ultimately left Goldman’s giant salaries and big bonuses to pursue a career in public service, trading in the bright lights of New York, London and Tokyo for Ottawa’s squat concrete office towers. “I was very fortunate to be able to persuade him to join us as a deputy governor [at the Bank of Canada],” says David Dodge, the Bank’s former governor, adding that he desperately wanted someone with Carney’s financial acumen. Dodge says he later “lent” Carney to the finance department, but didn’t realize he would be gone for three years. By the time Carney returned in 2008, it was as Dodge’s replacement — just in time to stickhandle the financial crisis, which he did with aplomb. His signature policy was the use of forward guidance, promising in 2009 that the Bank would keep interest rates near zero for one year. “Working with Mark was a real privilege,” says Tiff Macklem, who tackled the 2008 financial crisis alongside Carney at the Bank and is now the dean of the University of Toronto’s Rotman School of Management. “He has an extraordinary ability to really get to the nub of an issue quickly. He’s not someone to sit on his hands and allow things to deteriorate.”

Related reading: Mark Carney to the Class of 2016: Be flexible 

Carney accepted an offer to head the Bank of England in 2013, although he only agreed to serve five of the term’s eight years. That led many to speculate he planned to use the position as a springboard to bigger and better things — perhaps the top job at the International Monetary Fund, or even a return to Canada to run for prime minister. But the move across the Atlantic brought new challenges and an increased level of scrutiny. The British press questioned whether Carney was really worth his hefty annual salary of $1.4 million (in 2013 exchange rates), which included an annual housing allowance of $400,000. A minor scandal erupted when Carney’s British-born wife, Diana, who at the time ran the left-leaning think tank Canada2020, tweeted what appeared to be a comment about the challenge of finding an affordable place to live in London. “I would be happy to help her find suitable accommodation,” Labour MP John Mann told the Daily Mail. “I’m prepared to move out of my London flat, which will be available at just four per cent of her housing allowance.”

At work, there were also early missteps, or at least miscommunications, that seemed to foreshadow the current confusion on interest rate policy. Shortly after arriving at the Bank of England, Carney promised to hold interest rates near zero until the U.K. unemployment rate was below seven per cent, once again employing his “forward guidance” trick. However when the joblessness rate fell faster than expected, the Bank backed off on the pledge. The change of direction was perceived by some as a policy failure, although Warwick’s McMahon says the Bank only said it wouldn’t consider raising rates unless the labour market recovered. Markets, on the other hand, took that to mean a rate hike would be imminent. It was enough to cause critics to question whether Carney’s earlier success at fending off the 2008 financial crisis had more to do with Canada’s well-regulated banks and an Alberta oil boom rather than his actual policies.

Carney’s efforts to modernize the three-century-old Bank of England, where gatekeepers wear pink jackets with tails and red waistcoats, was somewhat less contentious. With the help of a consulting firm, he implemented a glitzy “One Bank” plan that aimed to make the sprawling organization work like a private sector institution. But while the changes were long overdue, that didn’t stop Fleet Street from erupting when Carney appeared to tread too heavily on British traditions, including a decision to scotch the annual cricket match at the Bank’s summer picnic. One former Bank insider describes Carney as confident and well-respected, if sometimes a tad un-British in his approach. “He’s pretty direct,” said the source, who spoke on condition of anonymity. However, the source also says Carney often seems like a man with a lot — perhaps too much — on his plate, given the Bank’s expanded responsibilities when it comes to financial regulation, as well as his duties as chair of the financial stability board, which took him to Beijing last week. “Sometimes there was a sense he’s trying to push it on, ‘Because I’ve got six other things to do today.’ ” Now, with Brexit added to the mix, it’s a wonder Carney has time for anything else.

All eyes will once again be on Carney and the Bank of England when it makes its Aug. 4 interest-rate announcement. A cut is once again widely anticipated. The Bank may also be exploring other measures such as more quantitative easing, which essentially amounts to printing money. Yet while such moves can help soften the financial shock of Brexit, they alone won’t be sufficient to ensure Britain’s economic future. “This is not, fundamentally, an economic or financial crisis,” Macklem says. “This is fundamentally a political issue that has significant economic and financial consequences.”

In short, that means it’s up to the U.K. government, not Carney, to ultimately lead Britain to economic prosperity with a well-thought-out post-Brexit plan. There’s just one problem: it’s not clear such a plan exists. Indeed, one of the most striking aspects of the U.K.’s Brexit vote was how quickly the leadership of the bombastic Leave campaign shrunk from view after the smoke cleared. Former London mayor Boris Johnson, one of the faces of the movement, not only withdrew his leadership bid but walked back much of his tough talk on immigration, leaving many Leave voters feeling duped. The mop-topped pol, who seemingly specializes in erudite insults of foreign leaders, was later tapped by new Prime Minister Theresa May to be foreign secretary — a move that struck many as a cruel joke, given the U.K.’s need to smooth relations with its former EU partners and other countries. Needless to say, Johnson got off to a rocky start during a recent trip to New York, where he was asked by journalists to explain why he once referred to U.S. presidential hopeful Hillary Clinton as a “sadistic nurse.”

It’s still unclear how Carney will work with the Conservative government’s new leadership, especially new Chancellor of the Exchequer Philip Hammond. Carney’s close relationship with former chancellor George Osborne, who wooed him away from Ottawa and was a big fan of austerity, has put him in the crosshairs of many Leave supporters and potentially some of May’s senior cabinet members. “If the U.K. economy tanks over the next year or so, Mark Carney is going to be the perfect scapegoat,” says Kirkegaard, the economist. “I’m pretty confident the new Conservative government wouldn’t have any qualms blaming the Bank for that mess.”

But those who know Carney well say he’s more than capable of navigating choppy political waters — that, indeed, it goes with the territory. “When times get tricky, things always get politically charged,” says Dodge, noting that previous Bank of Canada governors Gerald Bouey and John Crow were attacked “viciously” when they presided over painful hikes in interest rates. Macklem, meanwhile, praises Carney for being a “very clear thinker and very articulate,” as well as a very down-to-earth father of four young daughters — all qualities he believes will be of value in the months and years ahead as the British wrap their heads around a new economic reality.

In fact, Macklem says if he were Britain’s prime minister he would do whatever it takes to convince Carney to extend his term to a full eight years, regardless of his popularity. “The U.K. is faced with a great deal of uncertainty,” he says. “Now more than ever, it needs the stability of the Bank of England and it needs Mark Carney.”

The homecoming party for Canada’s superstar central banker, if it’s indeed in the cards, may have to wait.

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