Alistair Darling discusses Brexit and limits of QE at Hamburg Summit

Former UK chancellor of the Exchequer Alistair, Baron Darling of Roulanish (Alistair Darling), kicked off the second day of the InvestmentEurope Pan European Fund Selector Summit in Hamburg by discussing the lasting consequences of the banking crisis, the impact of monetary policy and prospects for Brexit.

Darling, who served as a chancellor during the 2008 financial crisis, placed the outcome of the British vote to leave the EU firmly in the context of the lasting effects of the crisis. Pointing to the persistence of economic inequalities between rural and urban parts of the UK, with the latter more likely to vote leave, he argued: “It was not 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.”

“The banking crisis, which was subsequently followed by an economic crisis is still a key reason for uncertainty today” he argued.

While immigration was a key theme of the Brexit debate, Darling stressed that he considered migration to be an overall beneficial factor for European economies; “but this is difficult to sell to people who have missed out on the benefits of economic growth” he admitted.

Darling backed Theresa May’s current position of delaying an immediate trigger of article 50 but also criticised the fact that she had not yet expressed a clear stance on how the UK should be exiting the EU. “We ought to sustain membership of the single market. Everyone has got access, but maintaining membership and being part of the customs union will be vital” he stressed.

Looking back to the immediate responses to the 2008 crisis, he argued that policy makers were right to opt for rescuing major financial institutions and that a failure of lenders such as RBS would have represented a major systemic risk for the European banking sector.

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

He went even further stressing that in the current context of Britain voting to exit the EU and given major geopolitical and economic risk, the theory of any lender being “too big to fail” appeared irrelevant. “In times of uncertainty, every lender becomes too big to fail because their default will affect other lenders, and we are living in uncertain times” he warned.

With regard to his personal role during the 2008 crisis, Darling was challenged by an Icelandic member of the audience whether 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 venue available in order to protect British savings.

Commenting on the lasting impact of the 2008 crisis, Darling expressed criticism of the current state of monetary policy. While be 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” he argued. Given historically low borrowing costs, he advocated an increase of government borrowing in order to finance infrastructure investments as a possible alternative.

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