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Trussonomics Mess Has Even France Fearing Contagion

This is a self-inflicted crisis at heart, but the scale of the turmoil also makes London look like a canary in the coal mine.

Trussonomics Mess Has Even France Fearing Contagion
Trussonomics Mess Has Even France Fearing Contagion

(Bloomberg Opinion) -- The French are worried about the UK. Not because of any competitive threat from an unshackled post-Brexit economy that’s tearing up European Union rules like a cap on banker bonuses. But because of the contagion risks of a budget plan so reckless it triggered a market selloff and a scramble by the Bank of England to intervene.

Just a few weeks after Prime Minister Liz Truss used France as an example of how not to attract investment, Bank of France boss Francois Villeroy de Galhau has returned the favor by warning lawmakers about the market volatility triggered by “Trussonomics.” That’s now a cautionary tale for governments that drop the ball on budget deficits and debt levels. Emmanuel Macron’s administration should keep tabs on public spending, bring down debt and not “add uncertainty to uncertainty,” he said.

Villeroy de Galhau is right that there’s no time for Paris or other capitals to gloat. Some of what’s coming out of the UK feels like a canary in the coal mine.

Trussonomics Mess Has Even France Fearing Contagion

Much of the UK crisis is self-inflicted, from the contents of its £161 billion ($175.3 billion) package of tax cuts and reforms to the communication around it. It’s not often that fans of Margaret Thatcher’s 1980s free-market economics are heard berating markets for betting against UK assets. It’s made the heirs of French President Francois Mitterrand look pretty good: France expects a budget deficit of 5% of GDP next year, while Barclays estimates the UK’s will be around 9%.

But there’s also concern that the situation reflects a challenge facing many other policymakers: How to deal with the end of an era of rock-bottom interest rates, cheap energy and low inflation, as well as greater volatility and exacerbated recession risks. 

Market jitters have spilled beyond the UK, seen in the surging cost of insuring against European corporate debt defaults as well as central bank interventions in Asia. The struggle to withdraw the monetary punch-bowl that underpins unsustainable asset-price booms — such as housing markets from Sweden to New Zealand, where prices rose almost 30% last year alone — is coinciding with war, an energy squeeze fueled by natural-gas shutoffs by Russia and a resurgence of populism. 

Whereas the 2020 pandemic taught governments to fight recessions with stimulus spending, Trussonomics is a warning that the conditions are no longer ripe for it. Energy-fueled inflation and tighter monetary policies are persisting even as Deutsche Bank CEO Christian Sewing expects a “deeper” recession in Europe in the next 12 months, while the UK is already in the throes of a full-year recession, according to S&P. 

In France, Macron is walking a tightrope in a country where public spending is the highest in the rich world and debt-to-GDP is more than 110% yet the economy is slowing and necessary reforms like pensions have run into widespread resistance. French bond yields have shown little in the way of UK-style jitters, but Villeroy de Galhau has argued with some justification that even without a shift to austerity, there’s a need to ease the debt burden. More European joint borrowing would be a defense against economic shocks, but that requires political will.

The UK’s policy adventurism after Brexit is certainly in a league of its own, having spooked markets more than even Italy’s new hard-right coalition. Truss’s bid to replace loose central bank policy and tight fiscal policy with the opposite combination is a huge gamble. France too is shelling out billions to cap energy prices, but it’s delaying tax cuts to protect public finances. 

Still, the abyss that British central bankers have been peering into in recent days as yields jump — possibilities include a house-price crash and a fire-sale of UK assets — has clearly resonated with other policymakers. Markets can turn fast: Pimco co-founder Bill Gross in 2010 warned that UK bonds were resting on a “bed of nitroglycerine” over too-high debt levels, before reversing his view later.

Market crises are humbling events. The UK’s global reserve currency and relatively low debt-to-GDP levels failed to protect it from a drubbing linked to a projected budget-deficit blowout. If this winter brings a worse recession than expected, while failing to ease the burden of high energy prices, it won’t just be London’s central bankers contemplating some tough decisions.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering digital currencies, the European Union and France. Previously, he was a reporter for Reuters and Forbes.

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