Of the many reasons to read Marginal Revolution, one of the foremost is the 7th “rule for life” of Tyler Cowen, one of its co-authors: “learn how to learn from those who offend you”. The pile-on aimed at the Truss-Kwarteng Budget has been so uniform that it is almost offensive to read those wondering what the fuss is about, including Cowen himself. And a week ago, reading The Economist on France’s latest budget, he wondered whether France’s position is not the worse of the two, and yet the UK takes the “PR whacking”.
It is not just a PR whacking. French and UK bond yields tell the same story. From MarketWatch, while French yields have risen quite dramatically since early August, driven by the Fed’s policy (I am given to believe)…
the UK equivalent has really risen, and the gap between yawned considerably
Since I tend to respect the reactions of markets (which flipped out at the UK “mini” budget, lighting the dry tinder lying around in the form of this “LDI” strategy), I assume there are good reasons for this. But, as ever, Cowen has a reasonable point. In media, I had tended to characterise what Kwarteng sprung on 23 September in terms of a sheer quantity of bonds he had suddenly forced the market to bear. But read what France is putting out there, and the UK clearly isn’t alone. For 2023, E300bn of financing, about a half of that roll-overs. So it can’t be that simple.
Then why is it that the UK deserved panic, and France not? Here are my best late-night guesses, and all of these probably interrelate:
Sterling. Is a much smaller currency than the euro. France’s issuance relative to the entire euro area is not that massive. Related to this ..,
…The risk of fiscal dominance/unmoored inflation France does not dominate Europe so much that its budget might on its own cause the ECB to shift its willingness or ability to control inflation. It is deeply weird even to think that the same might happen with the UK. But Conservative leaders have mused openly about the Bank’s target, and appeared to lump it in with an “orthodoxy” they wanted to assault – shortly before launching a budget so expansionary that it indirectly forced the Bank to act in the gilt market …
Current account/kindness of strangers. France’s current account is approximately in balance, whereas the UK is reliant on foreign funding, borrowing 8.0% off the rest of the world. Maybe we aren’t going to have a balance of payments crisis. But people do not HAVE to lend to us.
Direction of travel. Yes, France is a low-growth developed country, and so is the UK. But until recently (e.g. up to 2016) the UK was generally in a much better position, growth-wise. Brexit, principally, has led to a down-shift in growth expectations that is still being absorbed. A lot of the people who lent money to the UK did so thinking we were the sort of economy that sat at the heart of a giant trading area, and grew most years at around 2%. Now we ain’t.
The UK energy price rescue is much bigger than others Maybe read the Breugel analysis (chart below). And please remember this: we were only meant to have a mini-Budget because this enormous package had been announced – and my assumption was that this was so that the Chancellor could at least set out how he intended to fund this package.
Instead he chose the occasion to announce tax cuts that were even more expensive than the energy support! See this from the IFS
Effective debt maturity? Because so much (32%) of the UK debt has been bought by the Bank of England, the effective debt maturity is much lower than the simple weighted average of the bonds sold. See the OBR’s discussion of it here. The BOE is obliged to remunerate the holders of the reserves it has printed to buy those bonds at the base rate or thereabouts (I think the alternative would be much higher inflation…). That base rate is now on a steep upward ratchet.
Loss of respect for institutions. It is not just abstract arguments about the orthodoxy. The Chancellor literally turned down the option of having solid OBR forecasts out alongside his mini budget. It was like him turning violently off the road, slamming the foot on the accelerator, AND shutting his eyes – and ours – at the same time. This is just unnerving. Sure – banks etc can produce their own forecasts. We have the IFS too. But the sense that the government doesn’t want us or them to know the economic/fiscal implications of what they are doing is very unsettling.
So – yes. The UK is not the only country to be looking mid decade at 4-5% deficits and 100%+ public debt ratios. And as Tyler implies, and our government doesn’t like noticing, it has more room to raise taxes in future than France (Then again, France has plenty of room to cut state expenditure, such as through pensions reform). But with its own currency, giant current account deficit, sudden disrespect for its own institutions, poor inflation dynamics, and a central bank forced (admirably) to demonstrate its independence while handling financial instability, I don’t think it is such a mystery why people are het up about the UK, and not France so much.