View from City Road: City warms to Tony Blair's Labour

If there was any remaining doubt about it in the City, yesterday's poll in the Daily Telegraph must have removed it for good; barring war, pestilence or self-destruction on a grand scale, the next government of Britain will be Labour.

Polls are notoriously unreliable, of course, but the scale of the lead enjoyed by Labour would appear to leave little margin for error. In the past such a finding might have been expected to send a shiver of apprehension through equity, bond and currency markets. Not this time, however. In part that is because a general election is still some time off, possibly not until 1997. But it is also because the poll has confirmed what the financial markets already, on the whole, believe; that Tony Blair would make a better prime minister than John Major. Labour too, is now perceived as a new party and one that is eminently electable.

The markets' relaxed view of something that is at least two years away is one thing; how would they react if Mr Blair were elected tomorrow? Not too badly at all, at least by the standards of past receptions to Labour governments, seems to be the message.

The reason is plain. Policy-making in the Anglo-Saxon world has changed. Governments now attend to microeconomic issues while the central bank oversees the key macroeconomic issue of inflation. As long as Mr Blair sticks to this - and he has said nothing to suggest that he won't - then he will be fine so far as the financial markets are concerned. Mr Blair as Bill Clinton and Eddie George as Alan Greenspan is a double act markets would accept as readily as they have on the other side of the Atlantic.

Since the Conservatives fell out of the exchange rate mechanism and shifted emphasis away from acute fiscal rectitude there is as little to choose between the macroeconomic policies of Labour and the Conservatives as between Democrats and Republicans.

Furthermore, it is one of the hoarier old chestnuts that stock markets do well under Labour governments.

During the first Wilson government of 1963 to 1970, shareholders saw a 100 per cent return on shares, or 13 per cent a year, and in the second period of Labour rule returns were nearly 200 per cent, or 40 per cent a year, according to figures prepared by BZW. Gilt markets did not do so well in the the first phase, returning only 5 per cent over the seven-year period but returns were over 100 per cent, or 20 per cent a year, under Labour in the Seventies.

Though this performance pales into insignificance compared with the seven and a half fold increase in the FT-SE All Share index since 1979, a period when the trend in share prices has shown virtually exponential growth, the rates of return were nevertheless reasonable.

Devaluation and a budget surplus under Roy Jenkins as Chancellor spawned a strong bull market in the late Sixties. North Sea oil from the mid-Seventies onwards so altered the financial status of the UK in the second period of Labour rule that firm stock and bond markets were unavoidable whatever misguided macroeconomic policies of intervention were being threatened or followed.

Nowadays international capital markets are far more powerful than they were then. The gnomes of Zurich are small-time amateurs compared with the forces at work in global markets today. Bond yields and interest rates react sharply and immediately to any sign of inflationary pressure. The markets are powerful enough to cancel out the effects of any fiscal excess.

Even if Mr Blair wanted to run riot, he would find it difficult to get the leeway. As it is, Labour seems happy to confine itself to the microeconomic issues - the minimum wage, healthcare reform, training and the workplace.