UK Meltdown helps Lagarde advocate for targeted budget support

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(Bloomberg) – If European governments are unconvinced by European Central Bank President Christine Lagarde’s warnings that excessive fiscal stimulus can cause serious damage, she could urge them to consider the UK.

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As eurozone governments brace for a brutal winter of energy shortages, Lagarde urged them to focus their financial support on the most vulnerable families. But the bloc’s biggest economies have instead preferred broad-based measures that keep bills down for everyone.

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Lagarde told lawmakers in Brussels on Monday that at most 20% of what was agreed met his criteria. “You have to work on that,” she said. Since then, the UK has shown how fiscal policy can go wrong.

The week after Prime Minister Liz Truss’ administration announced the biggest package of unfunded tax cuts in half a century, Britain’s financial markets soared and the economy failed. -not far behind: the pound crashed to a record high against the dollar, then rebounded. after the Bank of England intervened in the gilt market to prevent a collapse. Traders, meanwhile, priced higher interest rate hikes to offset inflationary pressures, raising recession risks.

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“It’s perfectly normal to help people through the worst of the energy crisis with targeted support, as long as you don’t jeopardize the long-term fiscal health of the country,” said Gilles Moec, chief economist at AXA Investment Managers.

Britain’s Chancellor of the Exchequer, Kwasi Kwarteng, has argued that supply-side reforms aimed at boosting economic growth meant his tax cuts would pay for themselves within five years. But he had dismissed Britain’s budget watchdog and investors were unconvinced by his projections.

“You won’t cheat the market with a growth dividend,” Moec added.

Eurozone inflation accelerated to 10% in September, and policymakers are starting to rally for another massive 75 basis point hike at the October Governing Council meeting. Markets are currently seeing rates around 3% a year from now – although any big fiscal move could easily drive up those bets.

Lagarde argued that too much fiscal support to too many will make it even harder for the ECB to get inflation under control.

“General measures without distinguishing between beneficiaries who urgently need support and those who do not, these measures certainly do not help monetary policy,” she said. “They can produce an upward level of prices that would run counter to the monetary policy effort that we are developing.”

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