British turmoil
As the UK battles rising bond yields, a weakening currency, political uncertainty, and trade tension with the in-coming U.S. administration, Starmer’s government finds itself on the frontline of the struggle.
The UK is an island under siege. One of the sieges is financial: the yield on a UK 10-year government bond is hovering around 4.8 percent, while sterling’s value against the dollar is falling. This has prompted foreign exchange traders to begin referring to the pound as the Great British Peso, and some commentators to push for immediate fiscal austerity.
The other siege is an ongoing attack on Britain and its frail and incompetent government. Since the turn of the year, Elon Musk has bombarded the Labour government with a string of accusations designed to eject Keir Starmer from power. Labour’s approval rating has slumped to its lowest ever level in a grim start to the New Year for Keir Starmer. The YouGov survey showed that 63% of voters now disapprove of the government’s performance, compared to just 16% who approve.
Musk’s chosen casus belli is the so-called “grooming gang” scandal, which emerged under successive governments in the first two decades of this century. From around 2011, a pattern emerged in police investigations which found that gangs of men had been preying on girls beneath the age of consent: tricking them into imagined relationships and then gang-raping them. Most of the perpetrators were immigrants of Pakistani origin. Numerous local and national investigations found the police had failed to investigate these rape gangs properly. Councils, which were supposed to care for some of the victims, downplayed both the crimes and the ethnicity of the perpetrators.
It was a major breakdown in the justice system because, despite scores of men being convicted, the number of victims runs into thousands, many of whom neither testified in court nor received compensation. For some reason, Keir Starmer urged the Labour party members of parliament to vote against an amendment calling for the government to set up a national inquiry into grooming gangs. This makes no sense to voters, and people are asking if Labour has something to hide? As a result, Musk accused Starmer of a deliberate cover-up and has allegedly begun discussions with aides about bringing Labour down. He offered support to the right-wing populist Reform Party, led by Trump supporter Nigel Farage. Musk has called for the King to dissolve Parliament.
Keir Starmer came out fighting against Musk, but the majority of Brits wonder why he would refuse to investigate the rape gangs. Attacking Musk, a close ally to Trump, might not be such a good idea either as it might jeopardize the UK-U.S. relationship. Also, in this case, Musk seems to be having a valid point. After all, Trump’s threat to impose tariffs on European states including the UK, should not be taken lightly.
The UK is also struggling economically. Linking cause to effect in the bond market can be difficult. A plausible account of Britain’s high cost of borrowing goes like this: Brexit has impaired the country’s economy and impaired its reputation for fiscal stability, so the UK is paying a higher price than any other G7 country for its borrowing. If Trump does impose tariffs on European goods, the argument goes, Britain will fare worse than its G7 counterparts in the EU because its trade balance and currency are more exposed to the U.S. than those of the Eurozone.
These dangers alone would be enough to put the Labour government on the defensive: its entire political project is premised on being able to stimulate growth through borrowing, state interventions, state direction, and industrial strategy. The Labour party does not necessarily have a strong history when it comes to the economy. They like spending other people’s money, clearly. Not surprisingly, Starmer’s economy is stagnating because global demand is weak, and the sources of potential growth and productivity have atrophied, and the Labour party has nothing to offer except more taxes.
Starmer’s government is obliged to fend off the bond market vigilantes with the traditional tools: fiscal rigor, central bank signaling and, if necessary, government intervention. The delayed and timid implementation of a new internet law, in effect an anti-free speech law, which would have obliged Musk to act differently and according to government regulations. The Reform UK party is rapidly gaining ground given Labour’s inability to act and absurd stance on free speech.
Starmer needs to deliver not just the long-term promise of growth and national renewal on which he won his substantial majority in July 2024, but also real, short-term improvements in living costs, housing supply and basic economic demand. The worst of all worlds would be if the UK caves to the pressure of the bond market, imposing renewed cuts to public spending. Britain, unlike Germany, has no debt brake, nor is it constrained by the rules of the Maastricht Treaty. It is on its own when it comes to dealing with the Starmer chaos engine.
European governments may be bemused, for now, at Starmer’s predicament. But they should watch it closely. Because this asymmetric mixture of trade war, bond market pressure and outright political interference is coming everyone’s way soon. There is little hope for the Labour government as they are fundamentally off target with their politics of high taxes, government interference, anti-free speech, and incompetent leaders. The UK seems to be heading in the wrong direction. Labour will still land on 25%-30% of the votes, but if Reform UK can steal enough votes from the conservatives and disappointed Labour votes, there can be a radical shift in UK politics over the next few years.