Prime Minister Liz Truss and Chancellor of the Exchequer Kwasi Kwarteng on a company visit to Kent.
(Photo: Reuters)
“Clown Economics”, “Kamikwaze”, “London falling” – these are just three of numerous not very flattering judgments with which the international media condemn the economic policy course of the British government, which has only been in office for three weeks, and its Finance Minister Kwasi Kwarteng.
The conservative market radicals around Prime Minister Liz Truss are believers. But their ideological mixture of tax cuts, deregulation and enormous debt resembles a suicide squad, both economically and politically. It is doubly ironic that the markets, of all things, are withdrawing their trust from the market ideologues and that the financial professionals in the City of London, who have been freed from bonus caps and showered with tax cuts, are betting against the policies of their political benefactors.
Is there a method to the madness in London, or are we just experiencing what former US Treasury Secretary Larry Summers described as “the worst macroeconomic policies of any major country” and Nobel Prize winner Paul Krugman as “zombie economics”?
Politically, the so-called “trussonomics” are based on the calculation of giving the British a feeling of security with an energy price cap worth almost 170 billion euros, while at the same time promising them a “new era” with less state and more market with tax cuts and a deregulation offensive. This is strongly reminiscent of Truss’ predecessor Boris Johnson, who always promised his compatriots the impossible.
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Bad check on an extremely uncertain future
Even the largest state intervention in the energy markets in recent British history can hardly be reconciled intellectually with the radical market battle cries of Truss and Kwarteng. Economically and financially, the two can only work out if the energy crisis is over quickly, the recession is no more than a hiccup and the global economy is already running at full speed again in the coming year. Nothing suggests that this “fairy tale scenario” occurs.
On the contrary: the conservative government’s economic program resembles a bad check on an extremely uncertain future. International investors quickly recognized this and are fleeing pounds and British government bonds. This drives up the exchange rate and the cost of borrowing. Yields on 10-year British gilts are already higher than those on Italian notes.
The Bank of England initially tried to counteract this with resolute rhetoric and later with rate hikes. However, this alone will not win back the severely shaken confidence in the British government’s economic and political skills.
More: The pound plummets: Markets distrust the new British government – and doubt the Bank of England