The world is cracking beneath our feet, and the financial markets are trembling in sympathy. A devastating earthquake has struck a key geopolitical fault line, war rages on in Ukraine, and the bond markets are sending signals that no Chancellor wants to hear. This is not a drill. This is a stress test for the global order, and Britain finds itself at the epicentre of the turmoil.
Downing Street has called an emergency COBRA meeting. The usual suspects will be there: the Home Secretary, the Defence Secretary, the Chief of the Defence Staff. But the man who should have the loudest voice in the room is the Chancellor. Because while soldiers and rescue workers deal with the immediate fallout, it is the fiscal arithmetic that will determine how long this crisis lasts.
Let’s talk about the earthquake first. A 7.8 magnitude tremor has flattened cities in a region that sits on a crossroads of trade and energy. The human cost is appalling. But for a financial editor, the first thought is always: what does this do to supply chains? The affected area is a conduit for oil, gas and grain. Expect a spike in energy prices. Expect food inflation to get another upward shove. And expect central bankers to tear what little hair they have left.
Then there is the war. Ukraine grinds on. The West’s commitment is being tested by political fatigue and empty ammunition stockpiles. Every dollar sent to Kyiv is a dollar borrowed on the bond markets. And the bond markets are no longer in a forgiving mood. UK gilt yields have been climbing. The yield on the 10-year gilt has breached levels that make the Debt Management Office wince. This is not a crisis of confidence in the Bank of England. It is a crisis of confidence in the entire Western fiscal model.
The market shock is the third leg of this unhappy stool. We have seen it before: a sudden repricing of risk. Flight to safety. The dollar strengthens. Sterling weakens. Capital flees the periphery and heads for the core. But where is the core now? Swiss francs? Gold? Bitcoin? The usual havens are looking crowded. And Britain, with its twin deficits and political uncertainty, is not looking like a haven. It is looking like a liability.
No. 10 will talk about resilience. They will talk about standing with allies. They will talk about the British spirit. All very noble. But the bottom line is this: Britain’s fiscal headroom has evaporated. The pandemic, the energy crisis, the war, and now this earthquake have blown a hole in the public finances that can only be filled by borrowing, or by taxes. And neither option is politically palatable.
The markets will be watching the COBRA meeting closely. They will look for signs of panic. They will look for signs of competence. Mostly, they will look for signs that the Government understands the gravity of the situation. If they see a plan that involves more borrowing without a credible path to repayment, they will sell gilts first and ask questions later.
Let me be clear: this is not a moment for Tory tax cuts or Labour spending sprees. This is a moment for fiscal consolidation. For austerity, if you want to use the A-word. The Chancellor should come out of that meeting and announce a fiscal rule so tight that it squeaks. Cancel the HS2 extension. Freeze public sector pay. Raise the retirement age. Anything that signals to the bond market that Britain is serious about its debt.
Because the alternative is worse. If the markets lose faith in UK plc, sterling will slide, inflation will surge, and the Bank of England will be forced to raise rates into an economic downturn. That is the playbook from 1976, from 1992, from 2008. We have been here before. And it never ends well.
So yes, Britain stands with its allies. That is the right thing to do. But Britain must also stand on its own two feet. And those feet are currently planted on very shaky ground.
