The British prime minister has destroyed London’s financial center with massive tax cuts in the hole. The central bank then exacerbated the crisis.
British Prime Minister Liz Truss has been in office for less than four weeks, but the count is already heavy. With a massive £45 billion in tax cuts and an energy price freeze with no funding to match, it has had a devastating false start, splitting its own Conservative Party and throwing financial markets into chaos.
The party conference over the weekend is likely to be uncomfortable for them. The Sunday Times quoted a deputy from her party as saying that Truss would be leaving at Christmas – she simply wouldn’t work sooner because the group didn’t know who to replace her. The Labor Party has already taken the lead in the polls.
“How not to lead a country,” was the headline in London business magazine The Economist. The 47-year-old politician, dubbed the “human hand grenade”, put pressure on the pound sterling with radical tax reform, the rate now stood at 1.11 euros. Investors demanded greater guarantees for UK government bonds, raising the bond’s interest rate.
Crash like 2008?
On Wednesday, the British central bank pulled the emergency brake and pumped £65 billion of new money into the financial system by buying government bonds. Otherwise, two UK pension funds that invested £1 trillion in UK long-term bonds would be threatened. According to some experts, there would then be a risk of collapse on a scale similar to the 2008 financial crisis.
According to Matthias Geissbühler, head of investment at Raiffeisen Switzerland, it is no longer possible to say whether it really would have been that bad. “If a larger pension fund collapsed, the pension funds of many people in Britain would have been lost and that would spell absolute disaster for those affected,” Geissbühler said in “20 Minutes”.
Economic crisis worsens
The danger was avoided. But in fact, the central bank wanted to fight inflation in the country, which was almost ten percent in August, by raising interest rates. According to Geissbühler, she did the opposite by buying government bonds, but was forced to do so: “It’s an ugly situation. Britain can’t control inflation and it’s exacerbating the country’s economic crisis even further.”
The effects on other European countries such as Austria or Switzerland are also small thanks to Brexit. “Foreign trade with Britain has since declined, otherwise the consequences would be felt much more severely,” says Geissbühler. However, some industries such as the automotive sector are likely to experience a drop in exports to the country. For some EU countries, like Germany, which also has high inflation, this is ominous.
Germany is also threatened by a crisis
The German government on Thursday announced a 200 billion package to fight the energy crisis, including a price cap. But that means there is no incentive to save, criticizes Matthias Geissbühler of Raiffeisen Switzerland: “The government wants to calm the population, but it only postpones the problem.”
This was also demonstrated by the gas price cap and the €9 ticket in the summer, which caused inflation to fall briefly, but it spiked further in September to 10% and thus to the highest level in 70 years.
Ultimately, Germany will have to finance the 200 billion at some point, which will be a painful process for the population. According to Geissbühler, Germany is threatened with recession next year, even if the country survives the winter energy crisis relatively unscathed.
Navigation account 20 minutes Time01.10.2022, 07:58| Act: 10.01.2022, 1:46 pm