An expert's point of view on a current event.
Liz Truss’s Britain Is a Morbid Symptom of the World’s New Era
The new British government is an economic disaster—and a symbol of a global political crisis.
By Adam Tooze, a columnist at Foreign Policy and director of the European Institute at Columbia University.
Foreign Policy, October 12, 2022
In the last few weeks, we have witnessed the remarkable spectacle of a Conservative government in Britain deliberately taking on the financial markets. With a surprise mini-budget promising 45 billion pounds (about $48 billion) in tax cuts targeted at high-earners, Prime Minister Liz Truss and Chancellor of the Exchequer Kwasi Kwarteng unleashed a currency and bond market crisis the likes of which Britain has not experienced since sterling was driven out of the European Exchange Rate Mechanism in 1992. At that time, Europe as a whole was convulsing. This time, the crisis was Britain’s alone. The last time a Tory government was subject to such near-total condemnation by global expert opinion was in 1956 amid the Anglo-French invasion of Egypt over the Suez Canal.
Of course, Brexit in 2016 was condemned by most reasonable international commentators as well. But that was not the policy of David Cameron’s government. It was an insurgent campaign led by Boris Johnson and the UK Independence Party. It was Johnson’s boast that he had defied “Project Fear”—the mobilization of establishment opinion against the Brexit campaign. Faced with a phalanx of mainstream opinion that included U.S. President Barack Obama and Jamie Dimon of JPMorgan Chase, Johnson dismissed concern for the future of British business with an expletive. He thus marked the moment at which the leading group within the Conservative Party separated itself from any conventional commitment to the “U.K. economy,” in favor of a more nebulous idea of national destiny and the more specific interests of Tory cronies.
Ever since, the political economy of Britain increasingly has resembled the annual showcase of Wimbledon—in cultural terms, a very British affair, celebrated around the world as such, but rarely a stage on which British players actually shine and certainly not an event to which the majority of the population is actually invited.
Preoccupied with Brexit and COVID-19, Johnson did not have time to develop an extensive program of government. Like the Cameron and May administrations, Johnson’s most important constituency appears to have been a rentier class of hedge funds and public-private contractors. But, as his electoral triumph in 2019 attested, Johnson also managed a broad-based political coalition ranging from patriotic working-class voters in the north of England to upper-class London types.
It is no secret that the Tory party has long included a more radical fringe. This includes figures such as Jacob Rees-Mogg, affectionately known as the member of Parliament for the 18th century. Johnson made sure to keep this wing of the party within his tent but balanced them with centrists like Rishi Sunak. Elected to Parliament in 2010, Truss and Kwarteng belong to a cohort of Tory politicians who have never known opposition. Neither has deep roots in the Tory’s traditional social milieu. Truss’s parents were Labour voters. She and Kwarteng were incubated by a coterie of free market, right-wing think tanks that first came to the fore during Margaret Thatcher’s rise to power in the 1970s and now thrive on obscure funding by dark money—some British, some not. When Johnson lost his grip, it was Truss and Kwarteng’s moment. Whom they represent apart from the 80,000 or so Tories who voted for Truss to replace Johnson is not obvious.
In style, their program was a quintessential post-Brexit manifesto, high on ideology and blustering self-confidence, promising a dramatic new vision of Britain’s future but lacking details. In substance, it was caricature of the rentier program, promising to slash taxes, roll back environmental and labor regulation, and cut already impoverished welfare benefits.
It stretches credulity to suggest that they actually believe this is a formula for national economic growth. It is certainly an agenda for greater inequality. They even appear to support an end to easy credit and low interest rates, despite the damage this will likely do to heavily mortgaged homeowners, once a core constituency of Thatcher, whom they claim as their hero. Trying to make sense of this seemingly perverse policy, some speculate that Truss and Kwarteng are so deeply beholden to rentier interests that they are exponents of disaster capitalism, provoking a housing crisis that would allow property companies to snap up large portfolios of distressed properties. The fact that analysts are driven to such far-fetched speculations points to quite how implausible the Truss-Kwarteng vision for Britain’s economic future seems.
It certainly didn’t make sense to the financial markets. The pound plunged. Bonds sold off. As yields surged, that triggered obscure derivative hedging strategies in the portfolios of private pension funds and threatened to unleash a fire sale of gilts, or U.K. government debt. That, in turn, forced the Bank of England to react. To stop the slide, it stepped in as the market-maker of last resort, warehousing debt that pension funds needed to sell for cash. The result is conflicting policies. On the one hand, like other central banks around the world, the Bank of England is promising to raise interest rates. At the same time, to prevent the financial system from imploding, it has to engage in another emergency burst of quantitative easing, buying bonds in exchange for cash.
In the short term, this has provided relief. The pension funds have been saved. The pound rebounded. Yields fell back. But it was not enough to save Truss and Kwarteng’s embarrassment. On the weekend of the party conference, they reversed the controversial tax cut.
The Tory party’s reputation both with the population at large and its own supporters is in tatters. Labour, under the uninspiring but reliable leadership of Keir Starmer, rides high in polls. Unless Labour finds a way to shoot itself in the foot, the party will, come the next election, inherit Britain’s ailing economy and threadbare welfare state. If the current opinion polls hold, it will have a giant majority. But given how parlous the state of the British economy is, no one governing in the U.K. faces good options. If there is a shred of reality in the Truss and Kwarteng program, it is a realization, after more than a decade of low growth and stagnating productivity, of quite how serious Britain’s economic impasse is.
The new prime minister is making Britain look like Argentina—in more ways than one.
One could dismiss the U.K. crisis as an idiosyncratic storm in a teacup. But that was not the view taken by global bond markets, which all experienced a moment of panic in reaction to the turmoil in London—and with good reason.
The British crisis highlights the huge stress that economic policy is under, worldwide, but particularly in Europe. The recovery from the COVID-19 shock was rapid but uneven. Inflation has tested the credibility of central banks. Now the energy crisis unleashed by Russia’s attack on Ukraine is convulsing the European economies. For lack of natural gas, it is not sure that any of them will get through the coming winter without drastic rationing measures and a severe recession.
The 45 billion pounds in tax cuts announced by Kwarteng made the splash that they did because they followed the unveiling of a far larger program, with cost estimates of up to 150 billion pounds, to stabilize energy prices. At the time, the program, valued at around 5 percent of Britain’s GDP, was the largest in Europe. This week, it was matched by a 200 billion euro ($195 billion) commitment from Berlin.
Chancellor Olaf Scholz’s announcement ruffled feathers in the rest of Europe, but German bond prices barely budged. Unlike British debt, German bunds are anchored as the benchmark assets of the eurozone. The real question for the financial stability of Europe will arise when Italy is forced to announce an energy subsidy package of similar dimensions. Italy’s public debt is already far too high for markets to easily absorb a program of German or British dimensions. The only country with a worse track record of growth in Europe than the U.K. is Italy.
But the lessons of the U.K. debacle are political as well as economic. The disintegration of the Tory party points to basic questions haunting modern conservatism. We may not be in the 19th century, when defenders of the status quo struggled to contain the threat of revolution. But the pace of social, cultural, technological, economic, geopolitical, and environmental change in the 21st century is frenetic. How should conservatives respond? If you run to the center as Angela Merkel did with the Christian Democratic Union in Germany, you risk being outflanked by more credible liberal and environmental parties and challenged on the right by openly nationalist and xenophobic parties. If you move to the right, you can win success as Giorgia Meloni has done in Italy and Jair Bolsonaro and Donald Trump did in Brazil and the United States, respectively. All three demonstrate the appeal of an authoritarian, nationalist agenda. But as much as they grab the headlines, none of them is resoundingly majoritarian. Their positions are too extreme for large segments of the modern electorate. And it is altogether unclear how their promises and their vote-winning populism translate into a constructive agenda for government.
Of course, centrist and progressive governments fail, too. The COVID-19 crisis offers a veritable how-to guide of governmental failure. But tantrums like the one we have just witnessed in the U.K. are not accidents. They are part of a piece with the meltdown of the Trump administration in 2020 over COVID-19 and the Black Lives Matter movement; the Brexit shock; the dogmatism of Germany’s stand in the eurozone crisis; and the recalcitrance of Republicans in the United States during the 2008 financial crisis. Conservatism in the 21st century has a reality problem, and sometimes it bites.
Adam Tooze is a columnist at Foreign Policy and a history professor and director of the European Institute at Columbia University. His latest book is Crashed: How a Decade of Financial Crises Changed the World, and he is currently working on a history of the climate crisis. Twitter: @adam_tooze
