by Damon de Laszlo, ERC Chairman
The world came together to mourn the death of Queen Elizabeth II. On view was tradition and pageantry that created a spectacle that many millions watched with sadness and admiration for a person who had given a life of quite unparalleled public service, while living a life under constant scrutiny – a role model for all who would lead.
For the United Kingdom, a new Carolean Era has started, with effectively a new government taking office simultaneously with the change of Monarchy. September 2022 is certainly a seminal moment in British history and might just possibly usher in some re-thinking by world leaders who came together for a brief time for the lying-in-state and the funeral. The global loss of focus on the key issues of the day, as governments under pressure from economic trends, global warming and Covid seem to focus on domestic and national issues and away from the global cooperation necessary to address today’s problems.
The United States, which is by far the most powerful and prosperous country in the world, has been unnerved by the growing industrialisation of China, and for some time the US attitude to China has been pushing it into the arms of Russia, a long-time natural enemy. Russia turning itself into a pariah state with its terrorist tactics in Ukraine has clearly annoyed and wrong-footed President Xi leaving a possible opening for re-starting discussions with the US. This, coming in the aftermath of a world pandemic, has destabilised the world’s energy and food supplies and should have changed global leaders’ thinking from confrontation to cooperation but, as I have said, meeting at the funeral of Queen Elizabeth II could be the turning point in attitudes.
The economic crisis in Europe continues to unfold with many political changes bringing about more nationalistic governments that will test European cohesion, further compounding the economic problems. The new British government has come to power with economic guns blazing! The new Prime Minister in her election campaign promised the Conservative Party membership everything in the way of hand-outs and in her new Chancellor’s budget that wasn’t a budget, delivered those promises in a massive tax-cutting and expenditure programme with no explanation as to how it was going to be funded. There is no doubt that the Government needed radical changes of policy and a shake-up of the machinery of government. Government expenditure, as a proportion of national income, has risen to a level not seen since the 1940s, however the announced tax reductions of some £45 bn., added to the energy price cap, an as yet unquantifiable number, already means that estimates for government borrowing from the gilt market will rise from £161 bn. to £234 bn. in the current financial year. Bizarrely, this enormous increase in debt will have the effect of itself pushing up the GDP figures, which will help the government claim success in raising GDP, as extraordinarily complex economic calculations are coming into play.
The greatest worry is the budget’s huge giveaways to the City of London, a pay-off to the banking and private equity industry which has promoted itself as wealth creators, rather than wealth destroyers that most City activities achieve. The giant economic experiment being undertaken could work if it is coupled with a rolling-back of state bureaucracy and expenditure. This, however, is going to be the really hard part, as there is no apparent policy on reducing state expenditure and borrowing. Rising interest rates now embedded in world central bank policy to reduce inflation will make the UK borrowing a lot more expensive and potentially further rattle markets that are already nervous after the British budget.
This is not helping the situation in Europe where there is growing concern about the stability and liquidity of the European debt market as the withdrawal of central bank largesse takes hold.
Western economies are in a situation that is exceptionally unusual. Inflation historically caused by excessive monetary growth, causing demand to exceed supply and precipitating a wage price spiral is in place, but the added confusion caused by Covid, the Russian attack on Ukraine, the weaponising of energy supplies is unlike anything that we have previously experienced. The sudden drop in supplies of food, energy and the raw materials that come from Russia cannot be solved by monetary or fiscal policy. In this, UK and Europe, along with Africa and the Middle East, have the greatest problem. Drought conditions and the drop in food production in all areas around the world are continuing to raise the spectre of starvation.
America is the wild card. Largely self-sufficient, its federal reserve policy will likely be able to tame inflation and indeed there are already helpful signs that this is happening. Supply side indicators are improving and the agility of the American economy to adapt is coming into play – the Cavalry may yet have a chance to rescue the West if not the rest of the world.
Damon de Laszlo
26th September 2022