'Britaly' Resembling Italy in UK... "Truss is the First Victim of the High-Interest Rate Era"

Liz Truss, Prime Minister of the United Kingdom [Photo by Reuters Yonhap News]

[Asia Economy Reporter Park Byung-hee] British Prime Minister Liz Truss announced her resignation on the 20th (local time), just 44 days after taking office, making the UK set to welcome its fifth prime minister since the Brexit referendum in June 2016. Immediately after the Brexit referendum, then-Prime Minister David Cameron resigned, and his successors Theresa May and Boris Johnson each served only three years. Truss has become the shortest-serving prime minister in British history.

The British economic weekly The Economist coined the term "Britaly," a blend of "Britain" and "Italy," mocking that the UK is becoming similar to Italy, which suffers from severe political instability and frequent government changes. Coincidentally, Italy is also about to appoint its fifth prime minister since 2016.

The Economist pointed out that the UK resembles Italy in three aspects: political instability, a sharp drop in government bond prices, and low growth. Regarding the recent surge in UK government bond yields (a sharp drop in bond prices), it noted that UK bonds have become a target in the bond market, similar to Italian bonds during the Eurozone crisis. Comparing productivity growth rates among the Group of Seven (G7) countries from 2009 to 2019, Italy was the worst by far, with the UK coming next. Amid severe political and economic turmoil, there have been four different chancellors of the exchequer since July. The Economist criticized that these complex problems are the root causes of political instability, leading to frequent government changes. When the Conservative Party took power in 2010, public trust in the government was 50%, but now it is less than 40%. During the same period, public trust in the Italian government fell from 17% to 4%.

Prime Minister Liz Truss of the United Kingdom is announcing her resignation in front of 10 Downing Street, the Prime Minister's residence in London, on the 20th (local time).
Photo by EPA Yonhap News

The Wall Street Journal (WSJ) diagnosed that Prime Minister Truss's resignation reminds us how narrow the political space has become for politicians in an era of high inflation and high interest rates. Over the past decade, during a period of low inflation and low interest rates, governments increased spending and accumulated debt, but as this era ended, the accumulated debt has become a boomerang, causing political and economic instability.

WSJ cited the UK as a prime example, explaining that the UK's government debt-to-GDP ratio rose from 80% before the COVID-19 pandemic to 100% currently. In this situation, Truss announced plans to increase spending to boost economic growth, effectively setting a trap for herself. Economists believe that if Truss's tax cut plan had been announced one or two years ago, the market reaction would have been different, WSJ reported.

Due to economic activity contraction from COVID-19, supply chain disruptions, and inflation caused by the Ukraine war, ruling parties have increasingly lost in recent elections. In Germany, Australia, and Sweden, governments have been replaced through elections after 20, 9, and 8 years, respectively, and in Brazil, which will hold a runoff election on the 30th, a regime change is highly likely. French President Emmanuel Macron succeeded in his re-election in May but lost the lead in national governance after the subsequent parliamentary elections.

The US Democratic administration, which will hold midterm elections on the 8th of next month, is also gripped by a sense of impending defeat. President Joe Biden's visit to Saudi Arabia in July, which was even mocked as "humiliating diplomacy," was ultimately part of a strategy to overcome the high inflation and high interest rate situation.

WSJ analyzed that regardless of who succeeds Truss, fiscal conservatism will dominate the UK for the next few years. With government debt already significantly increased due to COVID-19 and interest rates rising, future government fiscal policies are expected to focus on reducing debt.

Susanna Stritter, senior analyst at UK financial services firm Hargreaves Lansdown, said, "The sharp rise in UK government bond yields after the tax cut announcement made not only the UK Conservative Party but governments worldwide recognize the power of the market," adding, "If the market is not satisfied, it will sell bonds, sharply increasing government borrowing costs."

This content was produced with the assistance of AI translation services.