Jamie Dettmer is opinion editor at POLITICO Europe.
“Sorry is a sorry word,” sings reggae artist Tarrus Riley. “I’m sorry that you are sorry, but sorry’s not good enough for me.”
That was the reaction of Britain’s Conservative lawmakers to now former Prime Minister Liz Truss’ apology earlier this week for a “mini-budget” that plunged the country into financial turmoil, wrecking not only her premiership but ruining the Tory reputation for economic competence.
But there are lessons here for European politicians and governments too.
In the end, Truss had no choice but to quit — she was in office but devoid of power, credibility and authority — and has now ended up as the country’s shortest-serving prime minister, trouncing the 119-day record set by George Canning in 1827.
Lord Canning, though, had a hell of an excuse for his quick departure — the poor man’s health failed, and he left office in a coffin. Also, despite his short-lived premiership, Canning left a tremendous political legacy, built up over two terms as Britain’s foreign minister during which he directed the seizure of the Danish fleet in 1807, assuring Britain’s naval supremacy over Napoleon Bonaparte. The eminent Victorian historian George Macaulay Trevelyan noted: “For five years England had been guided by the genius of Canning, and seldom have so much brilliancy in so much wisdom combined to produce such happy results.”
Truss certainly didn’t have Canning’s grasp of geography as foreign secretary — earlier this year, she even confused the Baltic and Black seas to a wave of catcalls from the Kremlin.
The Continent’s general reaction to the spectacular crash of Truss’ pro-growth ambitions has been thinly veiled satisfaction, mixed with sorrowful crocodile tears about Britain’s continual loss of stature on the world stage, first triggered by Brexit.
“She had hoped to use radical steps to shock the economy out of years of stagnant growth, but her plan has so badly rebounded it has stunned the country, creating economic consternation,” noted Ireland’s Sunday Independent. Meanwhile, European Union officials view Truss’s misguided economic policy as just another example of the madness Britain has been in the grip of since voting to exit the bloc.
There’s also been the predictable claim that Truss’ effort to introduce supply-side reforms shows just how foolish an endeavor it was, marking the final nail in the coffin of Thatcherite and Reagan-like “trickle down economics.”
But Truss wasn’t following Margaret Thatcher. Thatcher knew that timing and sequencing are everything, and in her first budgets, she focused on curbing government spending before embarking on tax cuts, deregulation and ambitious supply-side reforms. As a thrifty grocer’s daughter, Thatcher insisted the numbers had to add up — unfunded tax cuts weren’t her thing.
Rather, Truss was following the example of Boris Johnson, her immediate predecessor, trying to have her cake and eat it too.
But Cake-ism isn’t just a British malady.
Believing one can dodge a painful economic reckoning after a couple of decades of lackluster growth, cheap credit, unprecedented monetary easing and massive spending on the back of huge borrowing still seems to be the orthodox view.
Take Italy, for example. Broadcaster SkyTG24 noted that Giorgia Meloni’s right-wing coalition made 40 public expenditure pledges but only explained how they would fund a trio of them. Their rival Democratic Party was even worse, offering 66 public spending pledges but detailing the funding of just four.
Back in the day, U.S. Treasury Secretary Paul O’Neill was also waved away by then Vice President Dick Cheney when he’d warned of a looming fiscal crisis, citing budget shortfalls and skyrocketing public borrowing. “Deficits don’t matter,” Cheney snapped. His position was that Republicans had won the election, and it was their turn now.
Deficit funding can, of course, boost a poorly performing economy, and imposing austerity in the face of a looming recession isn’t a good idea either. But massive, long-term deficits and huge borrowing is detrimental to economic growth and stability. And from the 2008 financial crash through to the pandemic, Western governments have been amassing eye-watering public debt. With interest rates low, that was feasible and sustainable — but for how much longer?
The markets have had a kill. And with blood reddening the water, they’re now circling, looking for another thrashing leg to gnaw on.
Yet, Europe’s finance ministers displayed surprising complacency in Washington last week, suggesting they won’t face the same kind of market volatility Britain has been going through. Ireland’s Minister for Finance Paschal Donohoe focused his remarks on the strength of the bloc’s banks, all thoroughly stress-tested since the debacle of the 2008 financial crash. “If you look back at the average deficit within the euro area, it is still far lower than many would have expected,” he added.
I’m not sure who exactly the “many” are, and while EU governments — including Meloni’s Italy — won’t go in for the extraordinary libertarian experiment that Truss tried, with the deficits and public borrowing costs of EU member countries and the rising risk of bond-market turmoil and unpredictability, there’s little to be relaxed about.
Some more hawkish souls argue that in his comments, Donohoe missed two broad lessons to be learned from the recent events in London. First, despite what Cheney believed, deficits do eventually matter, and living beyond your means will catch up to you.
Second, it wasn’t Britain’s banks that were at risk, it was the less regulated shadow finance sector that controls trillions in assets — insurers, investment firms and pension funds. That’s where the Bank of England had to step in to head off systemic risk.
Faced as it is with growing financial strains amid soaring inflation, Europe’s shadow finance sector is similarly vulnerable to bond shocks, raising the possibility of bailouts, central bank interventions and yet more borrowing. This backdrop has already alarmed the European Systemic Risk Board, which issued a general warning last month, noting severe “risks to financial stability stemming from a sharp fall in asset prices,” with the “potential to trigger large mark-to-market losses that may, in turn, amplify market volatility and cause liquidity strains.”
Britain may very well just be ahead the pack.
