opinion | Britain has replaced Italy as Europe’s problem economy

At the beginning of this month, pessimists looking for the next financial crisis in Europe were pointing to Italy. Just as the pessimists predicted, so did the Italians Elect a populist coalition Post-fascist leadership Italy Brotherhood Party. But a funny reversal occurred. The Italian economy appears temporarily stable. Britain has emerged as a weak power in Europe.

What gives? Intellectual fashion has been at odds with globalization for several years now, so it’s easy to miss the answer. But the coup between Italy and Britain underscores an old lesson. Sacrificing some sovereignty and submitting to the rules of international organizations is not necessarily a bad thing. If the rules work reasonably well, doing so may be an advantage.

Despite the disapproval of the responsible government led by economist Mario Draghi, and despite its replacement by a hateful populist alliance, Italy is in a reasonable position because of the European Union. Although populists used to vehemently denounce Germanic orthodoxy in Europe, they now promise to do so. Implement The economic plan Draghi devised and approved by the European Union — not least because it comes with nearly $200 billion in post-pandemic recovery aid from Brussels.

Italy’s populists also want to put the European Central Bank in their corner. Over the summer, fearing another eurozone crisis caused by price shocks from the Ukraine war, the central bank set up a bond-buying program to protect volatile countries from shorting hedge funds. To retain access to this support, Italy has to avoid crazy policies.

In short, this is not Europe as it was twelve years ago. Rather than responding belatedly and reluctantly to signs of stress, the continent is trying to anticipate problems. Italy has deep structural fragility, ranging from demography to debt, and much could still go wrong. But for now, smart money is stabilizing it.

Meanwhile, having left the European Union, and never been a member of the Eurozone, Britain is in the opposite position. The new Conservative government led by Prime Minister Liz Truss faces almost no restrictions. It was expected to be daring. It turned out to be crazy.

The first signal came with its response to the rise in natural gas prices. To protect low-income Britons from choosing between heating and eating, Truss had to make subsidies. But she chose a terribly expensive remedy, trampling on her party’s reputation for budget prudence. Truss support is set to run for two full years. They are especially generous to the wealthy. At the UK government’s own estimates, they will cost More than 60 billion dollars in the next six months, a whopping 4.7 percent of GDP over this period. Because of its design, it will end up costing more if natural gas prices take another bullish blow.

Megan McArdle: The era of free economic grants is over. Britain’s tax cuts have to be paid for, one way or another.

But this was just a rehearsal. On Friday, in a bid by Rygansk for higher growth, the Truss team announced a devastating package of unfunded tax cuts. It did so despite the obvious risk that the stimulus might add to inflation, which is now 9.9 percent It is expected to rise. It did so despite the impact on Britain’s national debt, which is Climate forecast to reach 90 percent of GDP in 2024-2025, up from 75 percent before the pandemic. It did so without allowing the government’s Office of Budget Responsibility to model the effect of its gifts.

Not surprisingly, financial markets panicked. Interest rates on two-year government bonds He hits 4 percent, up from 0.4 percent a year ago, adding to the expected government debt burden. Pound fell 3.4 percent Against the dollar by the end of Friday, its biggest drop in two years. Over the weekend, Finance Minister Kwasi Kwarteng pointed out It may lower taxes even more. And soon the pound fell even more 4.7 percent When Asian markets opened on Monday, they briefly dived Lowest level Since the floating currency system began in 1971. Then the pound rose in the hope that the Bank of England would intervene to stabilize it. When the bank said it would not hold an emergency meeting, the currency fell again.

Why did the Bank of England disappoint traders? It has only a modest stock of foreign exchange reserves, so it cannot support the pound by stepping in to buy a ton of it. Its only option is an emergency rate hike, a premium of 0.5 percent Delivered last week. This would help sterling, and by lowering import prices, it would reduce the rate of inflation. But higher interest rates will push the economy into a ditch and raise the cost of servicing the national debt. Given the reckless resolve of the Truss team, he may attack the central bank and undermine its independence.

When the Brexit referendum damaged Britain’s access to a major export market, economic punishment was inevitable. But this is the first time that being in a currency union has seemed more attractive than being outside. The European Central Bank is in a much stronger position to combat crises than the Bank of England.

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