The collapse of European economies has now begun, starting with the continent’s weakest economic link: Britain.
This country’s collapse was triggered by the release of the new Government’s budget last Friday. The budget was ridiculous – an expansionary package in an economy with high inflation and an enormous trade deficit – and it sparked a sell-off in the gilts market, which soon spread to the market for sterling. Pension funds are now facing huge losses. Next will come more inflation, a recession and higher unemployment.
The media has leapt to blame the Government – as if a single budget announcement could trigger a full-scale economic collapse. “Are you ashamed of what you’ve done?” BBC Radio Kent asked Liz Truss, in a shallow spectacle that has become all too common in contemporary Britain.
The truth, however, is that the budget was just an excuse. The financial markets have been making noise about the economic situation for weeks. At the beginning of September, traders were jokingly referring to the “British peso”; rumours were circulating of British bond trading desks handing off their trades to the emerging markets crisis desk. Anyone with any exposure to the City knew what was going on. That should have included the Bank of England and the Treasury – who appear to have been asleep at the wheel since the war in Ukraine started; nay, since the lockdowns started.
What was the City worried about? High inflation and an out-of-control trade deficit. At the end of August, Goldman Sachs projected inflation in the U.K. would reach 22% next year. A few days later Deutschebank projected a current account deficit of 10%, something unprecedented outside of basket-case emerging markets that experience serious financial bubbles.
What was the cause of these imbalances? The answer is simple: energy costs. Britain imports a lot of energy. When the cost of energy rises, imports balloon and the trade balance collapses. These higher costs are passed on to consumers and henceforth comes inflation. This is a crisis not simply facing Britain but all of Europe; Britain fell first because it was the slowest animal in the pack.