Britain at a Crossroads: financial turmoil meets political threats

As the UK battles rising bond yields, a weakening currency, and Musk’s online assault on democracy, Starmer’s government finds itself on the frontline of a global power struggle.

I am writing this from 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 existential attack on Britain’s democracy. Since the turn of the year, Elon Musk, the richest man in the world and the owner of X.com, has bombarded the Labour government with a string of insults and disinformation designed—according to a report by the Financial Times—to eject Keir Starmer from power.

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—often taxi drivers or others involved in manual work—had been preying on girls beneath the age of consent: tricking them into imagined relationships and then gang-raping them. Some, but not all, of the perpetrators were 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. It has become a cause célèbre for the extreme right.

What the far right wants is for the British state to associate this pattern of sexual violence with Pakistani ethnic identity. But it cannot. First, because the state’s records of the perpetrators’ ethnicity are patchy; second, because professional criminologists simply will not draw such binary conclusions.

When Labour refused to call yet another national inquiry into the scandal, Musk piled in. He accused the Labour minister Jess Phillips of assisting genocide, 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, urged it to ally with the convicted criminal and far-right leader Tommy Robinson, and then slammed the party’s leader—Nigel Farage—when he refused. He has called for the King to dissolve Parliament and reposted numerous offensive messages from fascist-aligned X.com accounts. And it is not over.

Keir Starmer came out fighting against Musk, while the British finance minister Rachel Reeves has played what English cricketers call a “straight bat” against the financial threat: calm words, orthodox policies, and non-engagement with the panic narrative. My fear, however, is that the perils of destabilisation will haunt both the UK government and its major European allies for as long as Trump is president and his ally, Musk, is engaged in his task of democratic destabilisation. Looming over the entire relationship between European states and these figureheads of American racism and misogyny is Trump’s threat to impose tariffs on European states, to seize Canada and Greenland, and to walk away from NATO. 

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; the crazed policymaking of the 49-day Liz Truss administration has impaired its reputation for fiscal stability, so the UK is paying a higher price than any other G7 country for its borrowing, despite its debt being well below 100 percent of GDP.

In addition, however, it is paying a premium for Trump’s mercurial policymaking. If he 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 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 direction, and industrial strategy. Yet the economy is stagnating because global demand is weak and the sources of potential growth and productivity have atrophied during decades of offshoring and the rise of rentier capitalism.

But Musk’s intervention feels like a deliberate “force multiplier” in an asymmetric attack. The bond markets target the fiscal authorities, Musk targets the stability and reputation of the government, while Trump puts the squeeze on Britain to spend more on defence, to accept a one-sided trade deal (locking us out of the Single Market forever), and preparing the way for his ally, Farage, to supplant the Conservative Party as the potential next government. This may sound paranoid, but it would not require Trump or Musk to possess the brain cells and political interest in the UK to enact this strategy, because there are numerous British figures surrounding them for whom this is a desired course of action.

Starmer’s government is obliged to fend off the bond market vigilantes with the traditional tools: fiscal rigour, central bank signalling and, if necessary, intervention. The delayed and timid implementation of a new internet law, which would have obliged Musk to act more responsibly regarding hate speech and disinformation, has left Britain currently defenceless against his online manipulation. Moreover, UK laws on foreign electoral interference may not be strong enough to prevent Musk from attempting to buy the next election.

Thus, the ultimate fate of the Labour government may depend on the forces it can mobilise within UK civil society and the goodwill it can garner from more traditional conservatives in Washington. Above all, 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 one sure-fire way of achieving this, even in a deindustrialised economy like Britain’s, would be to rearm to meet the external threat posed by Russia. Rachel Reeves, the finance minister, has pledged never to borrow for day-to-day spending, only to invest. If the Strategic Defence Review—an independent and external review of UK military capability—mandates the government to lift defence spending substantially, then the path may be open to higher borrowing, particularly if Trump makes the same 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, while failing to mobilise progressive forces within civil society to resist the far right. 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 chaos engine that is the incoming Trump administration, which is, not surprisingly, exactly where the Brexiteers wanted it to be when they designed their catastrophic project.

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.

This is a joint publication by Social Europe and IPS-Journal