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Stock market turmoil: How populist politics is subjected to a reality check

2022-10-02T16:31:02.412Z

The British financial disaster shows that bad politics are now quickly and relentlessly subjected to a reality check.



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Clouds over the financial center of London: bleak prospects

Photo: Reinhard Krause / REUTERS

Populism is a political strategy to make the world look simpler than it actually is.

That's what makes it so appealing: simple answers to pointed questions - and if possible dissing someone.

However, when populist denial of reality encounters reality, it can have severe consequences.

You can ruin entire countries this way.

Britain is experiencing it right now.

England of all places!

The country that not so long ago was ruled by cosmopolitan, far-sighted political professionals who stoically and soberly managed the descent from global empire to European middle power and were able to bear this loss of importance with dignity.

But this England is history.

The Queen is dead, and figures like former Secretary Douglas Hurd have long since retired.

England has been in the hands of populists for years, and it's clearly not doing the country any good.

Until recently, Boris Johnson led the noisy political bullies.

He had to go, not because of his erratic political style or because the exit from the EU, for which he is largely responsible, turned out to be a serious mistake, as expected.

But because of a series of actually ridiculous misconduct, such as parties during the corona lockdown.

Unfortunately, England's Conservatives failed to carry out a reality check after Johnson's forced resignation.

You should have given yourself a break: take a deep breath, sort yourself out, get in touch with reality.

Instead, Johnson's successor, Liz Truss, and her finance minister, Kwasi Kwarteng, have gone one better: they are now in the process of ruining their country.

(Watch

out for the UK Conservative Party Conference

Tuesday .)

UK on sale

Panic broke out on the financial markets last week.

UK sell-off - Investors race to exit.

The symptoms are troubling enough, but the causes are far worse.

The exchange rate of the pound has fallen drastically, particularly against the dollar.

The fall in value of government bonds has been staggering, compelling the Bank of England these days to intervene in financial markets to prevent pension fund collapses.

At the same time, the central bank actually wants – and has to – slow down the galloping inflation.

Now she is being forced by the government to do the opposite.

The pound exchange rate had stabilized for the time being at the weekend, but the situation remains shaky.

The contours of a crisis of confidence are emerging, which is more reminiscent of moderately managed emerging countries.

The International Monetary Fund, representatives of the US government and central bank, top executives of large British companies, international rating agencies, the domestic Labor opposition anyway – they have all recently urged the British government to come to its senses.

Because Great Britain is not a third-class emerging country, but one of the largest economies in the world, which is home to one of the most important financial centers.

As Britain falters, the foundations of financial stability elsewhere shake.

The crisis of confidence was triggered by the announcement of comprehensive aid to cushion the consequences of skyrocketing energy prices on the islands.

That is socio-politically necessary, but also very expensive.

At the same time, Finance Minister Kwarteng announced a tax cut package intended to relieve the burden on the wealthy in particular.

In interviews he then explained that further tax cuts should follow.

But Britain, heavily indebted and dependent on capital inflows from abroad, cannot afford such lax fiscal policies, especially in times of high inflation.

Hence the nervousness among investors.

Nevertheless, Truss and Kwarteng continue to try populist economic policies.

more on the subject

Liz Truss and the British Crisis: When Thatcher Nostalgia Leads to RuinA column by Thomas Fricke

The government's course is not based on actual possibilities, but on hopes.

The Prime Minister and her Chancellor of the Exchequer pretend to follow their role models Margaret Thatcher and Ronald Reagan.

In the 1980s, they managed to boost the economy in Great Britain and the USA with a mixture of tax cuts and deregulation.

An era of liberalization followed a phase of extremely rigid economic policy that had characterized the previous decades.

The aim was to promote entrepreneurship, to intensify competition and to remove international trade restrictions.

This program was successful for a while.

In the long run, however, the concentration of wealth and power, which the neoliberal course shrugged off, became a problem in Anglo-Saxon countries.

The biggest hits of the 80's - and today's worst

Irrespective of ideological judgements: Taking Thatcher and Reagan as role models today as a British government has little to do with the actual situation in the country:

Firstly, Britain's markets are largely liberalised, especially when it comes to the labor market.

Abolishing banking regulations that were put in place after the 2008 financial crisis is a bad idea, as it can lead to a further loss of confidence.

Second, the self-declared grandchildren of the supply-side reformers are responsible for the biggest protectionist program in recent economic history: the exit from the EU internal market, a project that Thatcher pushed vehemently in the 1980s – the opposite of her purported goals.

Third, the UK government has little financial leeway, unlike in the 1980s when public debt was low.

According to OECD statistics, the government debt ratio is now over 140 percent of gross domestic product (GDP), more than twice as high as in Germany - a consequence of the rescue measures during the financial and corona crises, the weak growth in the 1910s and a low level in European comparison tax rate.

This is the reason for the current loss of confidence: A populist government announces a wishful thinking program that is at best loosely anchored in reality.

Truss and Co. have set themselves an ambitious growth target based on which they want to generate future income, but have not presented a realistic plan of how they intend to achieve this goal.

If the government wants to combat the social impact of energy increases - which is inevitable - it has to get the money elsewhere: through savings or tax increases.

If it wants to do something for the supply side of the economy, then the best way is to move closer to the EU internal market;

improved educational facilities, especially for young children, to enable mothers to return to work sooner;

a liberal immigration policy;

public investments in infrastructure and much more.

The OECD, the organization of market democracies, presented a comprehensive UK report in August, which contained a number of constructive suggestions.

But all of this is difficult, complicated, lengthy and riddled with a lot of conflicts over distribution – in other words, quite unattractive from the slogan-loving perspective of a populist political approach.

The price of populism

A characteristic of populist economic policy is the ignoring of side effects and consequences.

A finance minister who takes out loans and thus drives up interest rates - like Kwarteng - makes it more difficult to finance private investments and thus thwarts his proclaimed goal of wanting to strengthen the forces of growth.

Those who go into debt leave liabilities to their successors, which limit their scope.

Those who hamper imports by imposing tariffs and other trade restrictions - like Donald Trump and the Brexiteers - cause shortages and price increases.

Anyone who makes immigration more difficult will later have to cope with a shortage of workers.

If you lower taxes for the rich, you have to scrape together the missing government revenue from poorer sections of the population.

If you don't do anything about global warming,

Economic policy is permeated by a multitude of such conflicts.

Simply ignoring them makes life easier.

And yet there is no way around it: everything has its price.

But how high this price is can be concealed quite easily because the consequences are indirect and occur with a time lag.

It is therefore not difficult for politicians to keep inattentive citizens in the dark about the negative consequences of their policies.

Expensive money provides a reality shock

The fact that populist economic policy was able to spread at all is due, among other things, to the very special economic conditions that have prevailed since the financial crisis of 2008.

Extremely low rates of inflation and interest rates gave the impression that governments had virtually unlimited credit.

In case of doubt, the central banks could secure creditworthiness at any time.

They bought up securities for trillions of dollars, euros and pounds, thereby driving down financing costs.

The state's budget constraint became a soft border.

In the USA, Donald Trump demonstrated how seemingly everything could be done at the same time: import tariffs and immigration restrictions, tax cuts and massive spending programs – an ideal-typical legal-political agenda.

But this agenda cannot be copied, because America is still the center of the global financial markets and the issuer of the world's most important currency.

Accordingly, the USA has more leverage than any other country: as the largest financial market in the world, it enjoys a broad inflow of capital.

This opens up room for maneuver that other countries do not have.

If you want to copy America – while pretending to protect the legacy of the iconic supply-side duo Thatcher and Reagan – you're going to be shipwrecked.

What's more, the days of seemingly inconsequential consequences are over in the USA, too.

While the US Federal Reserve has lavishly supported loose fiscal policy for too long, it is now on a very different trip: in the face of high inflation, it has reined in money supply growth with an emergency brake.

Instead of buying up state promissory notes, it is now throwing some on the market – making borrowing even more expensive.

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Short-cut politics: How permanent outrage destroys our democracy

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This is how it works worldwide: interest rates are rising, the central banks are stepping on the brakes;

Currencies are coming under pressure against the dollar, further fueling inflation and requiring even stricter monetary and spending discipline.

The central bank may now be too restrictive after having been too permissive before.

But these are the secondary conditions under which economic policy is currently working.

For the foreseeable future we are dealing with a phase of extreme financial stress.

Truss also likes to point to the "global factors" that would weigh on Britain's financial situation.

That's true, of course, on the one hand.

On the other hand, sensible governance includes orienting oneself to the prevailing circumstances and accepting these limits to action.

Effective budgetary constraints are particularly critical in a country like Britain, which is chronically dependent on capital imports to fund its spending;

the minus in the foreign trade balance (»current account deficit«) amounted to eight percent of the gross domestic product (GDP).

Populist policies are now quickly and relentlessly subjected to a reality check by the financial markets.

And that might even have a healing effect.

The most important economic dates of the coming week

Expand areaMonday

Luxembourg –

Sanity Check

– The finance ministers of the euro countries (“Eurogroup”) meet to discuss economic developments and inflation.

ExpandareaTuesday

Frankfurt -

German economy

- The mechanical engineering association VDMA publishes figures for incoming orders in August 2022.

Luxembourg -

Update

- Meeting of the finance and economics ministers of the entire EU: The question is whether the governments' plans for accessing funds from the EU Corona recovery fund ("NextGenerationEU") should be changed, how the EU proposed by the Commission as emergency measures against high energy prices.

Birmingham -

Licking the Wounds

- Conservative Party (»Tories«) Party Conference.

Premier Truss and Treasury Secretary Kwarteng have to answer for what is probably the worst possible start for a British government.

ExpandareaWednesday

London -

On Strike

- More rail strikes in the UK.

The train drivers want more money.

Vienna –

Scarcity

– The oil cartel OPEC and its partners, including Russia, are discussing further production strategies.

Wiesbaden –

Globalization going astray

– The Federal Statistical Office presents new figures on German exports.

Expand areaThursday

Prague –

EUplus

– First meeting of the new European Political Community, a forum for neighboring countries.

Among others: Britain's Prime Minister Truss.

ExpandareaFriday

Washington -

Damn tight

- The US government releases data on the unemployment rate in September.

The labor market has been surprisingly strong in recent months, which has further boosted wages and hence inflation.

ExpandareaSaturday

Prague -

Core Europe

- Informal summit of the 27 EU countries.

Central themes: Russia's war against Ukraine, the energy crisis and the economic situation

Source: spiegel

All business articles on 2022-10-02

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