What does Mark Carney’s call to take back control mean for UK?

The slogan’s genius was in its ability to channel a multitude of issues that troubled the UK electorate. From austerity to migration. From European federalism to economic liberalism. It was therefore with delicious irony that one of Brexit’s most staunch adversaries - Mark Carney - used his set-piece speech at the World Economic Forum in Davos to urge the “middle powers” of the world to take back control. Mr Carney – no longer Governor of the Bank of England, but now reincarnated as Prime Minister of Canada – got a standing ovation for his speech. Davos Man, himself no friend of Brexit, has gone on quite the journey over the last decade.

The backdrop to Carney’s speech was the Trump administration’s weaponising of US economic power to lay claim to the freehold of Greenland. By threatening new trade tariffs on NATO allies that didn’t accede, this was (briefly) a pivot from using the threat of tariffs to rebalance US trading relationships to facilitating expansionist ambitions. Carney noted that the ability to resist such threats is impaired if the middle powers “lack strategic autonomy: in energy, food, critical minerals, in finance, and supply chains”.

The diplomatic challenge now being posed by the US amplifies the security challenge posed by Russia, and the economic challenge posed by China. The middle powers have concluded that they have insufficient control and resilience to withstand these simultaneous challenges. Greenland appears to be the straw that has broken the camel’s back.

Once the globalist, always the globalist, Mr Carney did acknowledge that taking back control and resilience comes with a cost. Fragmentation of trading networks, of pooled industrial and technological capability, of strategic alliances turns the page on economies of scale. It also further hampers the ability to address complex issues that require global co-ordination like climate change, cybercrime, and the emergent guardrails for AI. Traditional Davos Man would weep into his Glühwein at the thought.

The question I heard most frequently from investors last week is how seriously should we take the prospect of global fragmentation? Here, again, Brexit might prove instructive. Costly fragmentation, to have any chance of success, needs clear-eyed conviction from its advocates. This was something, whatever one thought of leaving the EU, that was lacking amongst those tasked with delivering Brexit. Amongst the middle powers, will there emerge a collective view of what they are seeking to achieve?

Subordination of defence and technology capability amongst the middle powers since the end of the Cold War has given the US, and China, a big head start. Catching up will require financing by countries whose debt piles and taxes are already high by historical standards. The alternative to further borrowing or higher tax rates would be to divert existing allocations away from social spending, including health and education. Good luck with that. The cynical investor is therefore skeptical that the rhetoric that laced the Swiss air will be backed by action. The suspicion is that tough talk is an attempt to provide sufficient cover until the next US Presidential Election.

For the UK, strategic autonomy in energy and finance remains lily livered. For all the talk of cheap, home-grown energy - the reality is that one-in-eight units of oil and gas we consume as a country now come from the US. Not only is it four times more polluting to extract and transport than our own supply, it is also the soft underbelly should the Trump administration look to exert economic pressure on the UK. The UK already has the most expensive energy in the world - a further energy price shock would be extraordinarily damaging to the UK economy.

As I have noted many times in this column, UK savers have more than half their assets invested in US shares, and US debt. The UK tax system is completely agnostic whether tax relief - worth almost £60bn a year - supports a semiconductor facility in Baltimore, in Beijing, or in Bristol. I can’t think of any other item of public policy that would be quite so loosely conditioned for its total economic impact on the UK economy. Building UK strategic autonomy in its own supply chains will require an urgent rethink on how investment - both public capital, and that which is incentivized by tax relief - gets into the heart of the UK economy. Defence, energy, and food security depends upon it.

The same policy debates are going on across all the middle powers. The understandable instinct is to cling to the low-friction, rules-based trade of goods, services and capital. The legacy of neo-globalisation has been an unprecedented period of economic prosperity and peace. But the ongoing viability of that era requires counterparty powers to also play by the rules. If US frustration with China’s trade stance defined the first Trump term, it is US frustration at the middle powers’ reluctance to fund their defence that looks set to define his second term. If threats to withdraw the implicit US security guarantee are the lever, investors should not be surprised if the middle powers then question the sheer dominance of the US Dollar, and the lack of control this gives them to dine, economically, at the top table.

My hunch is that domestic politics are sufficiently fragmented (there is that word again!) to make difficult decisions amongst a junior coalition of middle power countries too onerous an endeavour. This was the experience of Brexit. When asked to face the up-front costs of fragmenting the UK from the European political and economic orbit – British politicians hadn’t the stomach for it. They instead opted for vassalage. We are about to find out whether “Take Back Control” by the globalists will yield a different result.