Trusonomics Mess has even France fearing contagion
Just weeks after Prime Minister Liz Truss used France as an example of how not to attract investment, Banque de France boss Francois Villeroy de Galhau returned the favor by warning lawmakers of the market volatility triggered by “Trussonomics”. It is now a cautionary tale for governments that drop the ball on budget deficits and debt levels. Emmanuel Macron’s administration should keep an eye on public spending, reduce debt and not “add uncertainty to uncertainty”, he said.
Villeroy de Galhau is right to say that Paris or other capitals do not have time to rejoice. Some of what comes out of the UK looks like a canary in the coal mine.
Much of Britain’s crisis is self-inflicted, from the contents of its £161bn ($175.3bn) package of tax cuts and reforms to the communication surrounding it. It’s not often that fans of Margaret Thatcher’s 1980s market economy are heard chastising the markets for betting against British assets. This looks pretty good to the heirs of French President François Mitterrand: France expects a budget deficit of 5% of GDP next year, while Barclays estimates the UK will be around 9%.
But there are also concerns that the situation reflects a challenge faced by many other policymakers: how to deal with the end of an era of low interest rates, cheap energy and low inflation, as well as to greater volatility and exacerbated risks of recession.
Market jitters have spread beyond the UK, as evidenced by the rising cost of insurance against European corporate defaults as well as central bank interventions in Asia. The struggle to remove the bowl of monetary punch that underpins unsustainable asset price booms – such as housing markets from Sweden to New Zealand, where prices rose nearly 30% last year only – coinciding with war, a squeeze on natural gas-powered energy, shutdowns by Russia, and a resurgence of populism.
While the 2020 pandemic has taught governments to fight recessions with stimulus spending, Trussonomics is a warning that the conditions are no longer ripe for it. Energy-fueled inflation and tighter monetary policies persist even as Deutsche Bank CEO Christian Sewing expects a “deeper” recession in Europe over the next 12 months, while the UK is already in the grip of a full-year recession, according to S&P.
In France, Macron is walking a tightrope in a country where public spending is the highest in the rich world and the debt to GDP ratio is over 110%, but the economy is slowing and needed reforms like pensions are slowing down. met with widespread resistance. French bond yields showed little British-style jitters, but Villeroy de Galhau argued with some justification that even without a shift to austerity there is a need to ease the debt burden. More common European borrowing would be a defense against economic shocks, but that requires political will.
The UK’s post-Brexit political adventurism is certainly in a league of its own, having spooked markets more than even Italy’s new far-right coalition. Truss’ attempt to replace lax central bank policy and tight fiscal policy with the opposite combination is a huge gamble. France, too, is spending billions to cap energy prices, but delaying tax cuts to protect public finances.
Yet the chasm into which Britain’s central bankers have been leaning in recent days as yields soar – possibilities include a crash in house prices and a sell-off of UK assets – has clearly found a resonance with other policy makers. Markets can turn quickly: Pimco co-founder Bill Gross warned in 2010 that UK bonds rested on a “bed of nitroglycerin” on too high debt levels, before later backtracking on his point. seen.
Market crises are humiliating events. The UK’s global reserve currency and relatively low debt-to-GDP levels failed to shield it from a beating from an expected budget deficit explosion. If this winter brings a worse-than-expected recession, without easing the burden of high energy prices, central bankers in London won’t be the only ones considering tough decisions.
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Lionel Laurent is a Bloomberg Opinion columnist covering digital currencies, the European Union and France. Previously, he was a reporter for Reuters and Forbes.
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