Trouble brewing in Europe

Investment Analysis Clubs Macro Economic Trends and Risks
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(welcome, fellow Fools! Nice link expansion and italics without those darn brackets. After more than 20 years, one is glad about little things!)

… both in Brexited UK:

Markets have become increasingly concerned about the prospects for the UK economy since the government announced plans on Friday to cut taxes by the largest amount in 50 years.

Sterling came under fresh, heavy pressure on the world’s financial markets after the [Bank of England] ruled out an emergency rise in interest rates to defend the struggling UK currency.

Gilt yields – the cost the government pays for its borrowing – also soared[ to a 12-year high]. Interest rates on 10-year government debt stood at 4.2% – up from 3.5% ahead of Kwarteng’s statement last week.

… and Italy, radiating through the eurozone:

*On top of the war in Ukraine, soaring energy prices and a looming recession, Europe now has to contend with an [Italian far-right coalition government] led by [Giorgia Meloni]’s post-fascist Fratelli d’Italia (Brothers of Italy). *

The new coalition government – which consists of Fratelli d’Italia together with two other far-right eurosceptic groups, Matteo Salvini’s nationalist League and Silvio Berlusconi’s Forza Italia – won more than 44 per cent of the vote, the highest percentage of votes recorded by extreme right-wing parties in Western Europe since 1945.

The big worry in Brussels, however, [is that Italy will fracture the fragile cohesion of the eurozone and force the region into a dangerous replay] of the disastrous debt crisis that played out between 2010 and 2012.

Common expectation is for the new government to be spendthrift and sympathetic with Putin. In a first statement from the ECB, Lagarde, who has eagerly bought up Italy government debt as she considered market yields unreasonable, stated the ECB would not fix ‘policy errors’. I hope she means it but given history I don’t buy it.

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SB, welcome back…

It seems none of us want to learn. Supply side econ, read tax cuts, do not grow the economy. They slow the economy. But for that it takes shouting down people with zero education in public finance. The UK conservatives are terrible with the UK economy. Doing something totally messed up according to all financial reckoning in the markets, both the bond markets globally and the forex. I guess the UK conservatives will call it a victory once again. Stop believing it the econ management superiority garbage.

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Now that those stifling EU shackles are gone, let’s appreciate that at least plans to support the most needy are going ahead:

LONDON, Sept 23 (Reuters) - Britain will scrap a cap on banker bonuses, its new finance minister said on Friday, pledging an ambitious deregulation of London’s financial industry to boost growth, but sparking fury from critics for helping the rich in an economic downturn.

The cap limits bonuses to twice a banker’s basic salary, with shareholder approval, and was introduced in the European Union to curb excessive risk taking after taxpayers had to bail out lenders in the global financial crisis. …

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Yep supply siders screwing the entire nation for a quick pound. The needy indeed. Next the tax cuts were only meant for the needy as well. Healthcare should only be for the needy as well. What else can we strip the English middle class of? Or education. Yes education is a waste on the newly poor. What would they do with it? Demand pay? Outrageous! After all to make this work we need to cut costs. Where have I heard that? We can cut the government. We can cut the workers. We can cut cut cut and cut, while raising prices. Oh heaven.

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Interesting thread. So Thatcher and Reagan were supply siders, correct? They seemed to do pretty well as I recall.

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let’s appreciate that at least plans to support the most needy are going ahead:

After hearing the residents of “the city” whine for years, the thought crossed my mind that the entire agenda for BREXIT was for British bankers to be exempted from EU regulation, while still expecting unfettered access to EU markets.

Their new excuse for tax policy would also run afoul of EU deficit regulations, without BREXIT.

Now, the UK can be as wildly irresponsible as Shiny-land. The GBP crashes? Channeling Gomer Pyle, “surprise, surprise, surprise”

Steve

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Just as a historical note, I believe discussion of Brexit pretty much destroyed the TMF UK Discussion boards to the point the boards were shut down, at least partly due to excessive moderation demands. It more or less took over every thread and was a little bit divisive. Beware Pandora’s Box.

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CMF, that is not true about Thatcher or Reagan. They slowed GDP growth in both countries. They lowered taxes which created a pattern of creating massive deficits. Then pointed at poverty and welfare as the culprit. The less we spent on welfare the more debt the federal govt ended up with. It was a lie that poor people were causing debt. Instead the wealthy were being paid out of the public coffers ie defense spending, and a lot of other spending. The only thing I can say is you were lied to a lot. Reagan called it disinformation. We all know or I thought we all knew that means lying to the public. It was shrouded as fighting the Russians. Laughable. It was screwing the public. It sank the American economy for about 80% of the public.

Today 90% of white males over age 50 wont be able to afford to retire. That was done out of spite to profit a few. The spite was padded in all sorts of lying. Reagan did really well?

I guess lying never goes away.

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Steve,
There is a time for supply side econ. It comes and goes rather quickly. Then greed sets in and we keep it. Lie lie lie.

But for the US and UK riding together is now a time of demand side econ. This move to do a supply side stunt in the UK has sunk the UK. Supply side econ usually takes decades to sink an entire nation. This was overnight because it goes completely against the needs of the UK economy. It was a dunce move. What is the point of owning a bank in the UK if the currency sinks faster than a cannon ball in the Thames?

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Interesting thread. So Thatcher and Reagan were supply siders, correct? They seemed to do pretty well as I recall.

Depends on how you define “do well.” Moderators please note: Although politicians were mentioned in the quoted text, the following discussion is 100% macroeconomics.
Supply side economics is a theory that if you cut taxes for wealthy people, they will have capital to invest in factories, R&D, etc. which will create many jobs. And in fact, these supply side tax cuts will actually increase government revenue.
When Supply side tax policy was first seriously proposed in 1981, it was promised that the federal budget would be balanced by 1984. Now, just as you’d expect and common sense would dictate, cutting revenues without cutting spending is going to increase the deficit. And the deficits increased by a lot.
Now at this point, someone usually says “yeah, but Congress increased spending.” That’s true BUT the executive branch proposed the increased spending and the same government passed both bills.
So what happened? We had increased government spending, paid for by deficit spending. That is classic Keynesian stimulus. And this stimulus worked. These economy improved (also thanks to plummeting oil prices), people went back to work and the economy grew.
But it didn’t grow particularly fast. The economy grew faster in the both the 1970s and the 1990s than it did in the 1980s. And thanks to the tax cuts that targeted the wealthy, unlike previous eras almost all of the wealth growth went top the top 25% while the lower classes stagnated.

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Leap,

Yes, this first move of the new PM was a dunce move, an obvious dunce move. Why? I do not believe it was just “I am a stoned JC/aristocrat and want a cookie.” I truly suspect behind it all lies a motive and strategy to reap cartons of cookies, basically by leveraging the valuation of the pound in the coming inflation. If my conjecture is correct, then the BIG question is for how long will they destroy the pound, and what happens next to save their underlying wealth.

david fb

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That theory is known as the “merely a flesh wound” theory of knighthood.

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When the GBP was devalued from $2.80 to $2.40, the press described the impact in terms of the drop in price of a new MG. That metric is useless now, as the volume UK auto industry has gone extinct. Outside of a few specialist brands, which are all foreign owned, there are no British cars made anymore. The British aircraft industry has been reduced to making subassemblies for Airbus. When was the last time anyone bought a piece of stereo equipment from Garrard or BSR?

All manufacturing and production in the UK now, accounts for less than 21% of UK GDP. Financial speculation, tourism, retail, and entertainment, account for over 75% of GDP. For the record, the US is even worse off, only 18% from industry and 77% from parasitic services. For comparison, industry accounts for 29% of German and Japanese GDP and nearly 32% of Mexican GDP.

So, what impact would devaluing the GBP have on the UK economy? They cut themselves off from easy access to the EU, which accounted for about half of UK exports. Meanwhile, goods imported to the UK will cost more, turning up the heat on inflation.

Steve…the fool now says my favorite term for the US is now verboten, unless I insert a hyphen.

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On the US board foreign topics with political content have never been an issue as the majority of posters have no skin in the game so discussion tends to be constructive. Mention the US health system and you get an endless flurry of involved posts though :smirk:

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I am sorry for the Brits, but I am also short via puts on the FXB. There may be a better way to do that, but the positions has been nicely profitable.

If the are going to wreck it, go along.

I expect that soon they will try a coordinated effort to reverse the dollar. Feel like it is one big game of chicken.

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As you note, financial services make up a significant part of the UK’s economy. The big problem of brexit, political incompetence and chaos, and the current pound crisis, is that none of it is very helpful for the financial hub aspect of the UK. For example, look into the concept of ‘passporting’

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Yup, UK banks limited to only a few services in the EU, if they comply with EU regs. It was those EU regs “the City” was always whining about. They were no doubt trying to have it both ways: easy access to the EU, without EU regs. Didn’t work out that way. So the government is apparently topping up the pockets of the financial honchos to make up for BREXIT not working out the way they wanted. Reminds me of the then CEO of Chrysler demanding the government give Chrysler a Billion dollars to make up for the “burden” of safety and emissions regs. Unlike the City, Mr Ricardo didn’t get his way.

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Actually I haven’t heard of even a single major UK financial institution in favour of Brexit at any point in the last 8 years i.e. before, during, and after.

I have heard though that EU tax transparency rules designed in the 2010’s were about to ensnare a number of hyper-wealthy Brits who were using tax havens for investments, and the timing of Brexit just happens to correspond exactly with the initiation of those new regulations.

The solution appears to have been, rather than flee the UK and move to the tax havens, simply turn the entire UK into a giant tax haven. This has since been extended to include e.g. zero-tax physical areas of the UK, freeports.

Specifically I’m thinking of the EU’s “anti tax avoidance directive” (applies member states Jan 1st 2020 onwards).

and e.g. related things like

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The bankers aren’t going to publicly say “we want BREXIT for our own benefit, and we don’t care how much it messes everyone else up”, are they? BREXIT sold to the mob as getting rid of foreign regulations and keeping foreigners out of the UK, gets votes. A bunch in the US did the same kabuki dance about keeping foreigners out, but, outside of a bit of enforcement theater, what did they actually do? Pass another huge, unfunded, tax cut for the “JCs”.

I may have picked up the City whining about EU regs because I was hearing the same narrative from the USian financial sector, and it’s water carriers on bubblevision: constant sniveling about “intrusive, burdensome, big gummit regulations, that make it so hard for New York banks to compete and keep their rightful place as the financial center of the universe”.

Bankers seem to think the road to financial nirvana is to have the most corrupt, sleazy, operation, so the US and UK are in a race to the bottom.

Steve

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The bankers aren’t going to publicly say “we want BREXIT for our own benefit, and we don’t care how much it messes everyone else up”, are they?

Well, I’ve followed the topic quite closely for the last 8 years or so, and every single senior & chief banker I’ve ever seen interviewed, has spoken along the lines of ‘brexit is extremely awful for us, hopefully the government will not go for full-on ‘hard brexit’, as we quite enjoy these 10-100’s of billions we extract as rent simply by being the established financial hub of Europe’.

It really isn’t for their benefit at all. There has been absolutely colossal job destruction & profit destruction in London as a result of Brexit. And if there were any gains of any form whatsoever, the “ERG” [A] would be yelling about them and pointing to them continuously. Notably, they are silent on this topic.

[A] anti-europe political extremist group within the conservative party, that were pushing for a hard brexit and using their MPs as leverage to control each PM

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