New British Prime Minister Rishi Sunak has already started wielding the ax of austerity in the kingdom by halting Boris Johnson’s megalomaniac project for a new royal yacht costing a quarter of a billion pounds. He has also forced government departments to present adaptation plans for across-the-board cuts of up to 15%, while businesses And households are preparing for an increase in taxes. Instead of an excess expenditure of £47 billion in the “mini-budget” presented in September by Liz Truss and being thrown in the trash, sources in Downing 10 are talking about an imminent cut of about £50 billion in the new budget. Sonak even rejected Its introduction to November 17, to try to find new budgetary sources that will maintain the necessary balance. Austerity measures are again on the table in the UK.
Sunak’s policy is about to shine a new light on one of the central questions facing the governments of the continent: how they should respond to the crises of inflation, energy and the economic recession, which are combined with each other, which are now taking place on the continent’s soil. Is it through the “austerity 2.0” measures (the first was after the financial crisis in 2008; AA) as planned by Sunak, or through breaking the budgets and deepening the deficits, as planned by other governments on the continent.
It is the UK that has so far set the “playing field” in this area for other countries. This, after she broke in the direction of fiscal responsibility and budgetary balance, following only two months in which she sharply turned in the other direction. The British financial system almost collapsed as a result of Truss’ economic baseless promises, which only exacerbated the line that Johnson led before it. The British media derisively called the policy of the two CAKEISM (“Cakeism”) – a promise to eat the cake and leave it whole. Terrass was elected because she promised the Conservative Party and the British public a cream cake and cherries – lower taxes, high growth and generous energy subsidies. Sonak is now trying to get back to a much more basic British diet.
All leading indicators point to an imminent recession
What happens in Britain affects what happens in other European countries, which also face the same dilemma. How to deal with soaring inflation, which seems to be going nowhere (10.7% in the Eurozone in October, above expectations), with a surge in energy prices that will not be close to ending after the coming winter (a 41% increase in the price to the consumer, which is still not close to embodying the increase in the price of gas , for example) and with the economic crisis created as a result of a combination of these crises, with the policy of the central banks to raise interest rates. This is to cool the demand in order to lower the inflation, which slows down the economy. According to estimates, in the coming quarter the European Union will already find itself in economic contraction. All the leading indices – the property managers’ index, confidence and industrial production – point to an imminent, deep recession.
In France, the government appointed by President Emmanuel Macron included energy subsidy programs and benefits for the weaker sections, as well as the general public, worth more than 45 billion euros for the next year. The national debt, which was supposed to be reduced after the corona virus, will remain high, well over 100% of GDP. The aid includes, among other things, the increase in pensions, the distribution of food vouchers, the limitation of rent increases and increased supervision of the permitted price increases in supermarkets. To pass the aid package , given the current political situation where Macron does not have a majority or a coalition in the House of Representatives, the government was forced to use the clause that allows it to do so without the support of parliament. This is the situation in the second largest economy in the Union – there is no parliamentary majority for the way it chooses to fight the current crises.
Italy may symbolize a more extreme approach within the Union, of more generous support for residents and businesses, even though the country is mired in debt and its debt-to-product ratio is over 150%. According to a report in “Bloomberg” this week, the new government headed by George Maloney is planning a deficit of up to 4.5% in the next budget year, instead of the 3.9% target committed to by the previous government – headed by Mario Draghi. Germany also reached deep into the budget pockets, and promised a “protective umbrella” worth 200 billion euros to subsidize the energy alone of German households and businesses. With a debt-to-product ratio of about 67%, it seems that the Germans are the only ones who can afford to incur new debts.
In any case, the words of French Minister of Finance Bruno Le Maire according to which “the Maastricht rules are no longer relevant” (the treaty required a maximum debt-to-product ratio of 60%, and a maximum annual deficit of 3% of GDP to join the Eurozone) – receive renewed validity when seen How the major economies on the continent are behaving these days.
Germany refuses a common debt of the Union
Another option for financing the flood of European government spending that is currently being discussed – from heating grants, through increased welfare budgets, electricity and gas subsidies for private consumers, energy subsidies for businesses to increased price controls – is for the European Union to take on a common debt. But Germany is far from agreeing to the step, which is in terms of subsidizing the debts that the southern European countries are immersed in by the northern countries of the continent. Only once did the Union do this, after the Corona epidemic – when Italy and Spain threatened to break it up. Germany then promised it would be the last time.
At the heart of the dilemma is not only fiscal responsibility, but the effect of these measures on the inflation itself that the governments are trying to burn. In practice, there is a clash of expansionary fiscal policy (breaking the budget and “pouring money down the funnel” on the citizens) with the monetary policy of the central banks, which actually tries to act in the opposite direction and reduce demand.
Italy, Spain and France do not want any more interest rate hikes
In the Eurozone, fierce debates are now raging in the European Central Bank (ECB) over the current interest rate hikes – how frequent and how high they should be. On one side, the countries of Northern Europe – Germany, the Netherlands and others who are pushing to raise again and sharply, even at a recessionary price; On the other side, Italy and Spain, and increasingly France as well. These countries are trying to avoid further sharp increases, which would increase their loan repayments, threaten their financial situation and also harm their ability to take on debt to help their residents. Macron had already warned the bank against interest rate hikes that would “crush demand” and Meloni was quick to define the latest interest rate hike as a “reckless choice”. Some European countries, it seems, must incur new debts to continue to exist.
Part of the battle is symbolic. In any case, Italy, France, Germany and 16 other countries are in one monetary basket of the Eurozone. The European Central Bank has already made it clear that it will not allow the spread between the borrowing costs of the Italian government and the German government to jump beyond a certain threshold in the free market, and will purchase Italian bonds to reduce it. The actual meaning is that an expansive fiscal policy on the part of Italy will be financed in the debt markets through the governments of the major European economies , like Germany. If the austerity measures are to flow from Britain also across the channel, then they will have to be uniform and similar. The Germans and the Dutch will not accept sharp cuts, while the Italians avoid it. And vice versa.