No hiding place for the weak in a world of global markets

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The Independent Online
IT IS RARE indeed for the head of a central bank to find himself blinking in the full glare of adverse publicity, yet Eddie George, Governor of the Bank of England, is at the centre of a controversy about his apparent willingness to sacrifice northern jobs for the benefit of southerners.

The row surrounding Mr George's remarks to a lunch for regional political correspondents earlier this week makes plain the full implications of the Chancellor's decision to give the Bank of England responsibility for setting interest rates.

It follows union demonstrations in Threadneedle Street and confirms "Steady Eddie" as the man we can all love to hate as the economy takes a sharp turn for the worse. He has become a lightning conductor for criticism that would otherwise strike at Gordon Brown, the Chancellor of the Exchequer.

Asked by one journalistwhether he saw job losses in the North as an acceptable price to pay for the control of inflation, the Governor replied that "in a sense" he did. "We can only seek to control through monetary policy the state of demand in the economy as a whole."

His remarks would have caused not a ripple among an audience of economists or bankers. To them - however much they might disagree with the specifics of Bank policies - it is simply not controversial to say that the Monetary Policy Committee has to set the cost of loans for the average of the UK economy - robust South and faltering North together - and that it cannot tailor policy to suit the weakest region.

After all, the North-South divide in jobs and prosperity is not the invention of the Bank of England, and cannot be closed up by monetary policy. If interest rates were set low enough to guarantee no rise in unemployment in the North-east, the economy would be delivering ever-higher earnings to those fancy southern fat cats.

Thanks to the concentration of declining manufacturing in the old industrial centres, if the North were to avoid bust, the South would be guaranteed boom. Britain's is a boom-and-bust economy in more than one sense.

While many economists think the Bank ought to have started cutting interest rates sooner, few believe it could have avoided altogether the strong pound which has wreaked havoc in manufacturing industry. Jobs on Tyneside have fallen victim to the tides of global markets at least as much as deliberate Bank of England policies.

In his unusual public defence, Mr George noted yesterday that unemployment in the economy as a whole is lower than it has been in 18 years, an achievement he puts down to a more stable interest rate policy.

He could have gone further, adding that the unemployment rate in the North-east is above the national average by a smaller margin than normal.

However, while true, the Governor's clarification does not really get him off the hook. The storm reveals the political pressure Mr Brown as Chancellor would be under if he were still in charge of setting interest rates.

Perhaps it confirms the truth of the argument that an independent central bank is less likely than a politician to alter policy in response to lobbying. But at the same time, it also shows how far the Bank has to go in order to win broad acceptance for its new responsibilities.

It would be a shame if the fever-pitched outrage of those offended by his comments discouraged the Governor from future efforts to communicate the Bank's thinking. Mr George, after all, is not the problem. If he were to resign, there would be another Governor carrying out the same kind of economic balancing act.

The MPC may well be able to continue cutting interest rates if the world financial crisis drags growth in Britain still lower. Yet the "too little, too late" reaction to the first cut in rates earlier this month shows that this would not settle the controversy.

The Bank's many critics seem unable to accept the unpalatable truth that what would best suit them as the economy stalls is still not in the long- term interest of the country as a whole.

Like it or not, and many do not, the Government has deliberately put interest- rate policy in the hands of people whose job it is to look out for the UK economy as a whole.