What is happening in the UK?

Joe Zammit-Lucia

6 mins - 28 de Octubre de 2022, 09:30

The political chaos enveloping the UK has made headlines around the world. Much of what has been said ends up telling us more about the biases and prejudices of the newspapers and commentators involved than it does about what is really going on. So here is my view – doubtless also based on my own biases and prejudices.

This is not an economic crisis
Many in Europe have postulated an economic crisis driven by Brexit. In his opening speech, Rishi Sunak, the new Prime Minister, also used the term ‘economic crisis’ to prepare the population for what will likely be an unpopular financial budget in November. 

But the UK is not in an economic crisis, and neither is it, economically, the sick man of Europe. It’s debt to GDP ratio is lower than that of France, Italy, Spain and many others. Public expenditure as a percentage of GDP is lower than its European peers and, briefly, may even be lower than the US. Inflation is at the same level as in Germany. Ten-year bond yields, after briefly nearing Italian levels, have now fallen back to near German levels.

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The country has its own currency and its own central bank. Sterling remains, so far, one of the world’s reserve currencies. The chances of the UK defaulting on its public debt are practically non-existent. Which is why the cost of UK credit default swaps are lower than those for China, France, Spain, Italy and Canada among others.

It is true that, post-Covid and post-Brexit, economic growth has lagged. Productivity figures (if we actually believe them) have also lagged for some time – maybe reflecting the country’s dependence on services rather than manufacturing making productivity improvement more difficult. These are challenges that can only be tackled over the long term.

The political crisis
What we are seeing is a political crisis that has been long in the making. More specifically, this is a crisis of the Conservative party – a governing party that has split into warring ideological factions that have become difficult to hold together –, a state of affairs that has been building since the days of John Major in the 1990s.

The country has had five Prime Ministers since 2016. David Cameron resigned after losing the Brexit referendum. Theresa May could not command enough support to see through a Brexit deal with the EU and only marginally won an election that she herself called. Boris Johnson won an overwhelming election victory and delivered Brexit – at least technically. He was ousted because of personal standards not considered appropriate for someone holding the office of Prime Minister. Liz Truss showed herself not to be up to the job of leading the country – and has, as a result, resigned within 45 days of taking office.

It can easily be argued that a country that is capable of removing one leader because his personal behaviour is not up to expected ethical standards while the next one only lasts 45 days when shown to be incompetent is a sign of strength rather than weakness in the political system. That the short-term turmoil is a price worth paying.

Over the last few years, the UK has toyed with the extreme of the Left offered by Corbynism and the extreme of the libertarian Right with Trussonomics. Both failed and were rejected - in contrast to other countries, including in Europe, where extreme factions have progressively succeeded in gaining lasting power.

What of Brexit?
So, what about the aftermath of Brexit?

There is little doubt that upending forty years of economic and political arrangements as part of the European Union will cause disruption – maybe disruption that will last for some years or decades as Britain explores its new role and a different economic model. 

Maybe somewhat like Henry VIII’s split with Rome, the long aftermath of that event sparked resistance, an eventual civil war and the beheading of the King. Eventually a new Protestant Britain emerged as a major power with a sprawling empire, much innovation and creativity in the arts and the sciences, and home to the industrial revolution.

The world today is a very different place from what it was in those times – as is Britain. Global interdependence is well-established, though now fraying. The post-war world order is under threat from a circle of authoritarian regimes. The West needs to stick together and find effective ways of collaboration. The UK will have to find its new role – outside the EU while being a significant player in the Western alliance. 

It will also need to explore new economic models in a 21st century world where the obsolete models of the 20th century are breaking down everywhere. This is the work of decades. It could be argued that Brexit could provide the shock to the system needed to stimulate new thinking while others may cling to the comfort of the status quo for far too long. Just like the traumas of WWII spawned a resurgent and successful Germany. 

Maybe Liz Truss’s mistake was not the idea of radical change – which is doubtless needed – but rather in going too far, putting blind ideology ahead of practicality, and trying to do it all far too quickly and without enough thought and care to navigate the pitfalls. Rishi Sunak is unlikely to make the same mistakes. He will, however, still face the challenge of maintaining order and unity within his own party. Keeping the extreme ideological zealots on side while not being led astray by them.

Will post-Brexit Britain be successful? As the Chinese like to say when asked the same question about Western civilization – it’s too early to tell.
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