Welcome to Britaly – International

Welcome to Britaly – International

In 2012 Liz Truss and Kwasi Kwarteng, two of the authors of a pamphlet titled Britannia unchained (Britannia Liberata), they used Italy as a warning. Massive public services, low growth, low productivity: the UK had the same problems as Italy and other southern European countries. Ten years later, in an unsuccessful attempt to chart a different path, Truss and Kwarteng helped make the comparison inevitable. The UK continues to suffer from disappointing growth and regional inequalities. But it is also held back by chronic political instability and is under fire from the bond markets. Welcome to Britain.

Comparison of the two countries is inaccurate. Between 2009 and 2019, the UK’s productivity growth rate was the second lowest in the G7, but Italy’s was worse. Britain is younger and has a more competitive economy. Italy’s problems stem, in part, from being in the European Union; those of the United Kingdom, in part, from being outside. Comparing the bond yields of the two countries is misleading. The UK has lower public debt, its own currency and central bank. The financial markets believe it has far less chance of going bankrupt than Italy. But while not a statistical truth, the expression Britaly captures something real. In recent years, the United Kingdom has come very close to Italy in three respects.

Today, policy is decided by stock traders specializing in government bonds

The first, and most obvious, is that the political instability that characterized Italy has infected the United Kingdom. Since the end of the coalition government in May 2015, the UK has had four prime ministers (David Cameron, Theresa May, Boris Johnson and Liz Truss), like Italy. It is likely that the two countries will continue to follow the same path in the foreseeable future. Giorgia Meloni should be sworn in as prime minister in Rome; and Truss’s future couldn’t be more precarious. The longevity of British ministers can now be counted in months: since July there have been four finance ministers; the Interiorist resigned on October 19, just 43 days after taking office. Trust in politics has declined as the chaos has increased: in 2010, 50 per cent of Britons trusted the government, today less than 40 per cent. From this point of view, the gap with Italy has narrowed from 17 percentage points to four.

The personality of the individual

The second aspect that links the two countries is that the United Kingdom has become the plaything of markets like Italy during the eurozone crisis, and the markets are in charge. The Conservatives have spent the last six years chasing the dream of greater British sovereignty, but they have lost control. Silvio Berlusconi resigned in 2011 after getting into trouble with Brussels and Berlin. Kwarteng was ousted from his post as finance minister due to market reaction to a series of tax cuts that would have created more debt. Government bond traders are now the arbiters of UK government policy. Jeremy Hunt, the new finance minister, canceled most of the tax cuts and rightly decided, as of April 2023, to redesign the government’s energy price guarantee scheme. The decisions he will have to make to fill the hole in public finances are designed with the markets in mind.

Just as Italians worry about the spread between their government bonds and bundle Germans, so Britons got a crash course in how government bond yields affect everything from the cost of their mortgage to the security of their pensions. In Italy institutions such as the presidency of the republic and the central bank have long acted as bulwarks against politicians. This is now the case in the UK too. By halting its emergency purchase of government bonds on 14 October, the Bank of England forced the government to reverse its course more quickly. Third, the UK’s low-growth problem is more entrenched. Political stability is a prerequisite for growth, not an option. It is tiring for Italian governments to get anything done. The same goes for those in the UK, when they are short-lived. If changes of prime minister are always around the corner, it is the pantomime and the personality of the individual that replaces politics. Johnson has been nicknamed “Borisconi” by some; continuing to hover on the political scene, he could make this comparison even more fitting.

While fiscal discipline should calm markets, it will not boost growth. Hunt is racing to balance the books as part of a medium-term tax plan to be presented Oct. 31. Saving money by spending less on infrastructure would be good for government bond yields, but it won’t help the economy grow. There is little room for drastic cuts to public services. It is better to phase out the “triple block”, a generous formula aimed at increasing state pensions, and to raise funds in more sensible ways: by eliminating the status of non-Sun (not domiciled, which therefore does not have to pay taxes) or by increasing inheritance taxes. Raising the income tax would be better than reinstating the increase in social security contributions, which fall only on workers.

The situation is becoming increasingly “British”. Conservative MPs are in disarray, as evidenced by their disagreements over the vote on fracking (the hydraulic fracturing technique to extract gas and oil), rumors of other resignations and intrigues about how long the prime minister will remain in power. Truss has become like Larry, the cat who lives in Downing street, the residence of those who lead the government, but exercise no power. If and when the deputies Tory (conservatives) will decide to drop it, they will have to find a replacement, instead of asking party members. The chances that the different warring factions will find a unifying figure are low.

Consequently, the hypothesis of early elections is strengthened. This is unlikely to happen: why the deputies Tory should they vote for their own disappearance? The idea that Truss, or any successor, would have no mandate is wrong in a parliamentary system. But if parliament can’t build a functioning government, then it’s time to turn to the voters. That moment is approaching.

The elections have not solved Italy’s problems. But there is reason to be more confident in the UK, where political instability is now a one-party disease. The Conservatives have become almost ungovernable due to the attrition caused by Brexit and the weariness after twelve years in power. Truss is right in identifying growth as the country’s main problem. However, growth does not depend on imaginative plans and big coups, but on a stable government, on a careful and united policy. As they are, i Tory I can’t guarantee it. ◆ff

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◆ This article was published in The Economist on October 19, 2022, one day before the resignation of Liz Truss as head of the British government and before, on 22 October in Rome, Giorgia Meloni sworn in as prime minister of Italy. On 24 October the British MP Rishi Sunak became the new leader of the Conservative Party and thus automatically prime minister as well, given that i Tory they have a majority in parliament.

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