Merlin Weekly Macro: Of Office Without Power, and Power Without Office

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“I wandered lonely as a cloud…”

They are a hapless, hopeless pair, the conjoined neighbours in Numbers 10 and 11 Downing Street. Keir Starmer is a prime minister who is not in his prime at all: he is a man in office but not in power; On the other hand, calling the shots (or more accurately, vetoing whatever shots Starmer might have called in the Middle East), Energy Secretary Ed Miliband is in power but not in office. Next door, Chancellor Rachel Reeves daily demonstrates her tenuous understanding of economics and what little grasp she has of the reality of business.

A dose of reality please, Ed, not ideology

Today we have an energy shock manifesting itself in sharply higher fuel costs. It may yet turn into a crisis if consumption remains constant but supply is constrained by war and destruction to the point fuel stocks become exhausted and rationing is introduced. That is in the control of Donald Trump, Benjamin Netanyahu and the Iranians (whoever among the dispersed leadership there is orchestrating a response). It will be determined by whether an “off ramp” deal is reached in the Iranian war, or if Trump decides to go the whole way and finish the job. The latter would almost certainly include further extensive damage and destruction to regional energy infrastructure. Unless he’s bluffing, Trump has offered 10 days before going left for a deal or right to rain more hell.

Miliband is 100% correct to say that opening new drilling capacity in the North Sea for oil and particularly gas will have zero effect on the price. Both are priced, traded and settled through global markets and mechanisms; however local the consumption or directional the delivery, they are fungible products priced according to global imbalances between supply and demand and the safety valve of inventories (as an illustration, the US is all but self-sufficient in oil and gas and yet consumer fuel prices have reacted no differently there from anywhere else that relies on external sources). Where Miliband is 100% wrong is that in preventing the opening of new capacity on long-term environmental grounds, he actively undermines the short term continuity of supply despite a demonstrable need for it. He cannot control the market price but he can ensure the flow, if not guaranteeing then at least helping ensure the lights stay on and society literally keeps moving.

Securonomics founded in sand

Rachel Reeves promised to get inflation and the cost of living under control. It is a pious hope and a false premise. No government in a free-market economy exercises such power: it may exert an influence over prices through persuasion or corporate coercion, but it has no control over raw material input costs which eventually need to be recovered. Where it does have a direct say is over employment costs as expressed through employment law, and the rates at which employment is taxed. Since 2024, not even two years since being elected, Labour has been on a paradoxical contradictory path of wanting to “grow the economy” while simultaneously setting out to undermine its own strategy. It has implemented a significant increase in employers’ National Insurance; it has raised the minimum wage; by subterfuge it has pushed through big increases in Business Rates; and through employment law, while advancing employees’ rights it has added greatly to the frictional costs of employment and has reduced business’s ability to flex its workforce in difficult times.

On top of which, today, in response to the inflationary pressures arising from an exogenous shock and warning against (almost making the accusation of) price gouging and profiteering, Reeves is haranguing retailers and banks not to pass on the higher costs of materials and interest to consumers and borrowers. Little does she seem to understand the ramifications and how it breaks the circularity of her own argument: absorbing the costs means businesses make less profit; nominal taxation declines as do after tax corporate profits and the proceeds either for reinvestment or distribution as dividends (most of which goes to pension funds and life insurance companies to meet their immediate cash obligations). Competitiveness is eroded and future employment opportunities are compromised. Labour has already presided over a period of sub-optimal growth at levels way below the economy’s potential capacity if left alone to get on with being busy and reasonably unfettered. Worse, for a party whose name is “Labour”, measurably fewer of its constituency is engaged in such a pastime: the rate of unemployment has risen in this government’s short time in office from 4.1% when it took office to 5.2% today, with an acute youth unemployment problem that is only getting worse. So much for her much vaunted “Securonomics”.

Deluding herself and in self-absolution of all responsibility, Reeves has one target on which to pin the blame: Brexit. In her words, it “did deep damage”.

10 years on, Brexit comes almost full circle

As the “Middle Powers” including Europe, Canada, Japan and the UK struggle to navigate the turbulent waters of today’s complex and dynamic geopolitics, seeking direction, relevance and security in a highly unstable and febrile world, Keir Starmer is showing a natural and accelerating tendency to seek solace in Europe. He would. He never wanted Brexit to happen in the first place. In Opposition, he pulled every lever possible to overturn the 2016 Referendum result. “Resetting the relationship with the EU” was an explicit manifesto commitment in 2024. His only constraint about the extent of his willingness to reintegrate is the political challenge from Reform and the risk of inflaming sentiment in the many Red Wall seats targeted by Reform UK which should otherwise be natural working class Labour heartlands.

Stamer’s process of “dynamic alignment” (in which we are a rule-taker and not a rule-setter) in chosen policy areas is well under way. It began last year. Chancellor Reeves is also driven by a conviction based on failure and fiction: failure to deliver growth thanks to her own policies undermining business confidence and the fictional belief that the UK economy is apparently “8% smaller” than it would have been had we never left the EU. That is a figure that is both as speculative as it is unprovable. Most of the eurozone has no growth; it is demonstrably absurd to suggest that the UK is either 8% behind the rest of Europe, or that it would have been 8% ahead given the extent to which we and Europe are still interdependent by trade.

This week, Starmer has floated the idea of a new bill that will reimpose 76 EU Directives, principally in the food and agricultural standards areas. The bill, to be included in the King’s Speech, will be laid after the May elections. In her Mais lecture at the Bayes Business School in London on 17 March, Reeves made it clear that beyond the measures already agreed including free youth movement in education (the Erasmus programme), agricultural and veterinary harmonisation, she would like significantly to extend the policy scope. It would include a progressive move towards a customs union, even if the words “Customs Union” are not specifically mentioned as too politically toxic.

Integration of defence procurement is back on the cards: specifically accessing the €90 billion defence loan pool for support to Ukraine; despite being dropped in November, almost certain to be revived is the UK’s participation in the EU’s Re-arm Europe Plan/Readiness 2030 programme. Within that programme, “SAFE” (Security Action for Europe) is the €150 billion defence equipment loan procurement facilitation scheme launched in March 2025. Both the Ukrainian relief pool and SAFE carry high commercial and financial tariffs. President Macron insists upon a UK minimum ongoing annual payment of €2.5 billion for the former, and a €6.5 billion joining fine for the latter plus an indeterminate ongoing annual fee, plus the novation of all intellectual property rights relating to any of the defence technology subject to financing through the loan scheme. In context, in year one, the combined access fees would be the equivalent of 13% of the defence budget.

Déjà vu: memories of 1990

“Perhaps the Labour Party would give all those things up, easily. Perhaps they would agree to a single currency, to total abolition of the pound sterling. Perhaps, being totally incompetent with monetary matters, they'd be only too delighted to hand over the full responsibility, as they did to the IMF, to a central bank.”

Thirty five and a half years on, under intense parliamentary pressure, off the cuff, spoken in anger and accusation by Prime Minister Margaret Thatcher across the Dispatch Box at Labour’s Leader of the Opposition Neil Kinnock, her words still have a depressingly timeless ring.

The debate at the time was about EU integration. As reported on 30 October 1990 to parliament by Thatcher on her return from the EU Council meeting in Rome, Jacques Delors, President of the EU Commission, had set out pragmatic proposals for full European union. As she said, he envisaged the “European Parliament to be the democratic centre of the Community, he wanted the Commission to be the Executive and the Council of Ministers to be the Senate”. Her famous rejoinder was “No! No! No!”. In less than a month she was gone, a victim of her own hubris and defenestrated by her party as Cabinet support for her leadership melted away.

Fast forward to today. What has changed? UK politicians can no longer be accused of being “incompetent with monetary policy”, not since Gordon Brown handed monetary policy to the Bank of England in 1997 and granted it independence. However, today’s chancellor is instead testing the bounds of fiscal competence, in danger of proving another of Thatcher’s assertions, that “the problem with socialism is that you eventually run out of other people’s money”. As for the EU and giving “all those things up, easily”, just as under Kinnock in 1990, today Labour under Starmer would cheerfully re-shackle the UK to Europe: with or without the pretence of a fight and at what cost remains (no pun intended) to be seen. 

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