The Financial Times this morning carries an important exclusive on British Prime Minister David Cameron’s defiance of a White House effort to counter Chinese financial power. The White House had been trying to organize a G7 boycott of the new Asian Infrastructure Investment Bank, which is seen in Washington as a Chinese-inspired rival to the American-led World Bank. In an astonishing departure from normal British diplomacy, Cameron has broken ranks to back the Chinese initiative. The Obama White House has retaliated by publicly criticizing the Cameron government for its “constant accommodation” of China. The Obama slap-down is well timed because Cameron is facing an exceptionally tough general election in less than two months.
So why did Cameron do it? Part of it may be personal. Rumors have circulated for years about his uneasy relations with Obama. But there is surely more to it than that. The fact is that the United Kingdom is second only to the United States as a net debtor nation. Although the United Kingdom’s participation in the new bank has been presented as just another instance of the export of British “financial expertise,” a little noticed underlying fact is that the United Kingdom is close to national bankruptcy. How so? Because it has been running ever larger current account deficits. These recently were running at an astounding 6 percent of GDP, which means they have doubled since 2010 when Cameron took office.
It is a fair bet that without constant infusions of Chinese cash (mainly via purchases of British Treasury bonds), the British pound would be toast – certainly British finances are in far worse shape than they were even in the mid-1970s when, in a humiliating corrective for the British establishment, the International Monetary Fund was sent in to London to sort things out. Meanwhile, unlike the United States, the United Kingdom lacks the fallback position that it can borrow abroad in its own currency. A major difference compared to previous times is that the United Kingdom cannot go to the United States with a begging bowl because U.S. external finances are almost as bad as the U.K.’s.