Matthew Lynn

If it came from Nigel Farage no one would be very surprised. Or from one of the band of German professors who launched the far-right AfD party. But the latest warning of a fresh crisis in the eurozone comes from a far more unexpected source: the European Central Bank (ECB). In its financial stability review published today, the ECB warns that the single currency could soon be plunged into a replay of the trauma of 2011 and 2012. Unfortunately, it is almost certainly right.  The review, published twice a year, is intended to warn the markets of impending risks to the system. Today’s update explores a familiar cocktail of risks, from the potential for a bubble in AI stocks to the danger that the return of tariffs might pose to the trading system.

It may well be the biggest and most significant choice the Starmer administration will have to take. If Donald Trump decides to impose huge tariffs on China, potentially sparking a global trade war, the UK will have to decide whether it backs America, or tries to steer a softer path with the European Union. All the indications are that it will choose Europe. The trouble is, that will prove a huge mistake – the British economy is very different from the rest of Europe, and we will be thrown overboard as soon as it is convenient.  The contrast has ground to a halt, and it makes little sense to tie yourself to a failing bloc Trump is not a man who is bothered by consistency.

Business taxes are soaring. Employment rights have been massively extended, the trade unions are getting more powers, companies are too dependent on low-skilled immigrants, and the planning system still makes it impossible to build anything. There are plenty of challenges facing the British economy that the Governor of the Bank of England Andrew Bailey could have drawn attention to in his Mansion House speech last night. And yet, instead he decided to reopen the Brexit debate. That was surely a mistake. There are two big problems with Bailey’s decision to reopen that can of worms Addressing the City alongside the Chancellor Rachel Reeves on Thursday, Bailey argued that relations with the European Union were crucial to getting the British economy moving again.

Perhaps he will walk through the lobby of the Pentagon with a kitchen sink. Or fire the entire IT department at the Fed, shift the IRS to Mars, while replacing traffic police with fully autonomous Tesla robo-cops. No one has any real idea yet what Elon Musk, the entrepreneur behind Tesla and SpaceX, might come up with now he has been appointed by Donald Trump to head up a new Department of Government Efficiency (or ‘Doge’). One point is certain, however. There will be some spectacular fireworks. And it will throw down a challenge to bloated governments everywhere.

It emerged over the weekend that Tesco might have to start putting up prices. So, we have learned over the past few days, will Sainsbury’s, BT, and even JD Wetherspoons, a company that is usually committed to keeping prices as low as possible. One by one, many of the major consumer brands in the UK have said they will have to push up the amount they charge their customers, and are pinning the blame for that on the Chancellor Rachel Reeves’s Budget. The trouble is, the government seems unable to find a response. It is losing control of the narrative, and will soon find itself blamed for a fresh spike in inflation.

No sombre music accompanied Rachel Reeves's Budget, nor was there a reading from Corinthians. Yet, those details aside, one point is surely clear: Labour's first Budget in 14 years was a requiem for entrepreneurial Britain. The four decades from the Thatcher reforms of the early 1980s, that turned the UK into one of the best places, at least in Europe, to start and build a company, are now officially over. Britain's economy will be a lot poorer thanks to the Labour government. In Labour land, entrepreneurs might as well not exist True, the Budget might not have been quite as bad as some of the advanced speculation suggested. Even so, no one should be under any illusions.: this Budget was a full-on attack on entrepreneurs and small businesses.

Where did it all go wrong for Volkswagen? The German carmaker is said to be planning to shut several factories and lay off thousands of staff. Workers who do keep their jobs could see their pay cut by as much as ten per cent, according to VW's top employee representative, Daniela Cavallo. If the revelations are correct, the three factories will be the first to be shuttered in the company’s 87-year history. It is hard to overestimate the scale of the shock that the claims about VW, a company that has always been emblematic of the country’s post-war economic miracle, has delivered to the German economy today. Yet Germany – and, indeed, VW – only has itself to blame.

Some thought Rachel Reeves’s experience at the Bank of England meant she ‘knew how to run the economy’. She would keep an iron grip on budgets and demand value for money. The reliability of her management of the Treasury would unlock a wave of support from global finance. Ahead of the election, Reeves, along with fanboys such as the former Bank of England Governor Mark Carney, boasted endlessly about her financial and economic expertise. But only four months into her time in No. 11, there are already alarming signs she has lost control of spending.  The public sector borrowing figures published today were far worse than expected. The government borrowed another £16.6 billion over September, which was £2.1 billion more than the same month last year.

Dubai, Italy or perhaps the Bahamas? Many multi-millionaires are discussing where they should flee to as the Rachel Reeves prepares to raid their bank accounts in the ‘Horror Budget’ scheduled for the end of this month. But not, as it turns out, Patriotic Millionaires, the group that campaigns tirelessly for higher taxes on the rich. Its members want Reeves to take more of their money. The papers are dominated by reports of wealthy entrepreneurs, and the few remaining non-doms, securing a bolt hole somewhere where Reeves will not be able to reach them, but Patriotic Millionaires has a very different message.

It could be 30 per cent. Or 35 per cent? Or perhaps 39 per cent? Heck, who knows, if Rachel Reeves wants to keep the accountants on their toes, perhaps 39.657 per cent. The Treasury is, according to the latest leaks to the Guardian, looking at an increase in Capital Gains Tax as it scrabbles around for tax rises to fund the Chancellor’s spending plans, while not putting up the amount ordinary people are paying. The trouble is, whatever number she picks it is not going to work – and Rachel Reeves is fast gaining a reputation as a shambolic Chancellor.

Cheap Chinese imports will flood the market. Even more jobs will be lost, and the country’s industrial base will be even weaker than it already is. UK Steel, the lobby group for the industry, has today called for tariffs to stop the last remaining steel mills being wiped out by unfair competition from lower cost rivals. It would hardly be any great surprise if a protectionist, union-dominated Labour government agreed to that. There is, however, just one snag. The steel industry has already long been neglected – and there is no point in trying to rescue it now.

Business confidence has plummeted back to the levels last seen in the wake of Liz Truss’s unfortunate mini-budget. Hiring has slowed down as employers worry about all the new rights Labour is about to award their staff. Consumer confidence has fallen, as people worry about the tax rises that will be imposed in the ‘Horror Budget’ set for the end of the month. And the economy, which was growing at a decent clip when the Conservatives left office, has now stalled, with zero growth in the latest quarter. The new Chancellor Rachel Reeves was facing a spluttering economy. But, hey, never mind. It turns out that the Bank of England is here to help – the only problem is its Governor Andrew Bailey may come to regret that decision.

It is not hard to imagine what will be in Rachel Reeves' 'industrial strategy'. There will be lots of ‘green industries’, along with plenty of ‘cutting-edge technologies’, all designed to nurture ‘national champions’ in the ‘sectors of the future’. And presumably Lord Alli, the Labour donor who has been footing the bill for Keir Starmer's wardrobe, will be put in charge of overseeing all the details. Alongside the tax rises in the Budget planned for next month, the Chancellor's promise of a full-blown industrial strategy is a troubling prospect.