Wolfgang Munchau’s piece “Why Burnhamomics will fail” is a more sophisticated article than John Rapley’s, and therefore a more instructive one to unpick. Where Rapley simply asserts that Britain is in hock to bond markets, Munchau attempts a theoretical account of why the vigilantes hold their power. Unfortunately, the theory is wrong, and the errors compound in interesting ways.

The ECB Argument

The centrepiece of Munchau’s case is a comparison between Britain and France. Bond vigilantes, he notes, have not attacked France despite its larger deficit and higher debt-to-GDP ratio. His explanation is that France is protected by the European Central Bank, which could intervene to suppress French bond yields if speculators attacked. Britain, lacking that backstop, is therefore more vulnerable.

This argument deserves careful attention, because it is wrong in two distinct ways.

The first error is the diagnosis of why French yields have remained stable. Bond markets do price in the existence of ECB backstop mechanisms such as the Transmission Protection Instrument. But those mechanisms come with conditionality: the ECB will act only while a member government pursues policies the institution considers sound. The reason investors are relaxed about France is not that they trust the ECB to intervene unconditionally, but that successive French governments have been too paralysed to do anything radical enough to make ECB support uncertain. Successive administrations have lacked the parliamentary majority to change anything substantive. Bond yields are not a wisdom-of-crowds verdict on fiscal rectitude; they are a price signal about the range of possible policy outcomes. When that range is narrow because government is stymied, the signal is correspondingly flat. French yields are quiet for the same reason a becalmed sea is still: nothing is moving. That is not the same as safety.

The second error is the claim that Britain lacks an equivalent capacity to control its yield curve. The Bank of England can manage the yield curve just as readily as the ECB. It can buy gilts at any maturity, hold rates where it chooses, and set a ceiling on yields it considers inconsistent with policy objectives. It does not do these things because it has chosen not to, within an institutional framework that treats market yields as a signal to be respected rather than a variable to be set — a policy choice, not an operational constraint.

Munchau has therefore identified a genuine asymmetry between Britain and France, but misread it entirely. France does not issue euros. The French government is a user of a currency issued by an institution it does not control. If the ECB declined to act, France would face a genuine solvency constraint — it could, in principle, run out of euros. That is precisely what threatened Greece, Portugal, and Ireland in 2010 to 2012.

Britain, by contrast, issues its own currency. There is no external source of sterling that can be withheld. The solvency constraint that makes the ECB necessary for France simply does not exist for Britain.

The subtext of Munchau’s argument is worth naming. He is a committed Europhile. The implicit conclusion of his analysis — that Britain would be safer with an external institutional backstop — points in only one direction. But joining the euro would transform Britain from a currency issuer into a currency user, creating for the first time the genuine solvency constraint that Munchau incorrectly believes already exists. The cure he is gesturing toward would introduce the disease he is misdiagnosing.

The Vigilante Threat

Munchau warns that if Burnham scraps Britain’s fiscal rules, bond market vigilantes would have “every incentive to attack.” He does not explain what this attack would consist of, or how it would operate against a government that services all its obligations in a currency it issues.

A bond vigilante “attacks” by selling government bonds, driving up yields. In the case of a currency user, this creates a genuine funding problem: the government must either pay higher rates to attract buyers, or find some other source of the currency it needs. For Greece in 2012 that was a genuine crisis, because Greece needed euros and could not create them.

For Britain, the mechanics are different. Sterling gilts sold by vigilantes pass to other sterling holders. The sterling does not leave the system. Yields may rise, but the Bank of England can control the yield curve wherever it chooses — it can buy gilts at any maturity and hold rates at any level it considers appropriate. That is a domestic policy choice, not a market verdict. A government determined to resist vigilante pressure could direct the Bank to hold rates, or simply instruct the DMO to stand down. If the DMO stops issuing gilts, reserves accumulate in the banking system and the balance drops through automatically to the Ways and Means account at the Bank of England — a facility the DMO discloses in its Annual Review each year as a matter of routine. The vigilantes would then hold sterling reserves instead, earning whatever rate the Bank chose to pay on them.

The vigilante threat is therefore not a constraint imposed from outside. It is a consequence of institutional choices made inside: the decision to issue gilts at market rates, the decision to let the DMO set the issuance calendar, the decision to treat the resulting yield as a signal of market confidence rather than as an arithmetic output of monetary policy. Remove those choices and the vigilante has no instrument.

The practical implication is worth spelling out in the context of Munchau’s specific policy suggestions. He reports that Jim O’Neill has proposed scrapping the pensions triple lock to impress the bond markets. This deserves more careful examination than it receives.

The demographic argument against the triple lock — not enough young people paying in — applies with equal force to the entire pension system, not just the state variety. Compulsory pension contributions were introduced precisely because private provision faced the same arithmetic. Those contributions are effectively a hypothecated tax, collected from workers and handed to the financial sector to manage. The financial sector then leverages them, charges fees for doing so, and lobbies persistently for the contraction of state pension provision — which would leave more of the guaranteed pension share of production passing through its hands rather than being distributed directly by the state.

The state pension is not an anomaly in this system. It is by far its cheapest and most rational component, delivering the guaranteed floor of retirement income without management fees, without investment risk to the recipient, and without the volatility of a system dependent on asset price inflation. Britain’s state pension is already among the lowest in Europe. The triple lock does nothing more than increase that floor in a rational and transparent manner.

If the pension share of national production has become politically contentious, the honest remedy is to make the redistribution explicit: tax private pension payments progressively to fund the state pension directly. That would make visible what is currently obscured — that it is compulsory private pension contributions that represent a drain on younger workers, not the state pension itself. Sacrificing the triple lock to impress the vigilantes is therefore a political cost incurred in entirely the wrong direction, in service of a constraint that does not exist in the form Munchau imagines, and at the behest of an industry with a direct financial interest in the outcome.

The Kim Jong Un Scenario

The most revealing passage in Munchau’s article is what he calls the “Kim Jong Un scenario”: a left-wing government that takes back control of the Bank of England, threatens to default on the national debt, and thereby “dictates any deal it likes.”

Munchau presents this as wild radicalism, safely consigned to fantasy. But the passage is doing something more specific than describing an unlikely policy. It is bundling together options of completely different legal and political character, and using the most extreme one to contaminate the rest.

Consider what the package actually contains. Directing the Bank of England to manage the yield curve is an executive option available under the Bank of England Act 1946, which preserves the Treasury’s power to give directions in the public interest. Declining to issue gilts at yields the government considers unreasonable is an institutional choice requiring no legislation at all. Both are dormant powers sitting within the existing constitutional framework, available to any government willing to use them.

Defaulting on sterling-denominated government debt is an entirely different matter. The United Kingdom cannot default on its debt without changing the law. The statutory obligations governing gilt redemption and interest payment are precisely that: statutory. Overriding them would require primary legislation to pass both Houses of Parliament and receive Royal Assent. There is no electoral mandate for such legislation. It could not be done by executive action, ministerial direction, or institutional fiat. It is not an option available to any government that has not specifically sought a mandate for it.

By placing default alongside yield curve control and Bank of England direction as though they form a natural trio of escalating radicalism, Munchau performs a sleight of hand. The constitutional impossibility of one option is used to cast the others as belonging to the same category of recklessness. A government that declined to issue gilts at punitive yields would not be threatening to default. It would be making a routine institutional choice well within its existing powers. The two things have nothing in common except their proximity in Munchau’s paragraph.

This is guilt by association as economic analysis. And it is, one suspects, not entirely innocent. A writer who believes Britain’s salvation lies in closer European integration has good reason to present the sovereign options available to a currency-issuing government as either legally impossible or the province of madmen. If the available tools look like a choice between submission to markets and nuclear annihilation, the argument for pooling sovereignty with an institution that provides a genuine backstop becomes considerably easier to make.

A government that understood its own monetary constitution would not need to threaten default, invoke Kim Jong Un, or contemplate any of the more dramatic machinery Munchau describes. It would simply instruct the DMO to stop selling gilts at yields it considered unreasonable, and the vigilantes would find themselves holding sterling reserves at whatever rate the Bank of England chose to set. The government is a price-setter on its own liabilities, not a supplicant at a market auction. The nuclear option turns out to be a letter to the DMO.

Taxation, Pricing Power, and the Labour Market

Munchau argues that raising taxes on high earners is self-defeating because they are mobile. He cites the non-dom episode: Rachel Reeves abolished what remained of the regime, some high earners left, and tax revenues fell. Milan is now booming.

The mobility argument is a distraction from a more fundamental problem with taxation in the current economic environment, and one that applies far more broadly.

Anyone with control of a real business treats taxation as a cost of production. Costs are passed on wherever market structure permits — to customers through higher prices, to suppliers through lower payments, or to employees through restrained wages. The question of who ultimately bears the burden of a tax rise is therefore not primarily about whether the taxed individual stays or leaves. It is about whether the competitive environment forces them to absorb the cost themselves.

The constraint on pass-through is competition for labour. In a market where jobs are scarcer than the people seeking them, workers cannot credibly threaten to take their labour elsewhere. Wage bargaining power collapses. The business owner with pricing power raises prices or holds wages flat, and the real incidence of the tax falls on workers and consumers rather than on the notional taxpayer. The Chancellor collects the revenue but achieves little redistribution.

The point is not that taxation fails but that its real effects depend entirely on what the labour market allows. In a labour market running at genuine full employment — where workers have bargaining power because employers must compete for them — the incidence shifts. The tax is harder to pass on. The distributional outcome the Chancellor intended is more likely to materialise.

The non-dom episode is a narrower story: a subsidy to a specific class of transient non-doms was removed, and some of that class departed. That tells us something about the elasticity of behaviour for people who were in Britain precisely because of a preferential arrangement. It tells us very little about the general limits of fiscal policy, and nothing at all about the incidence problem that actually constrains redistribution.

Productivity Without Money

Munchau’s positive agenda centres on productivity. No prime minister can succeed without a rebound in productivity growth. This is his one confident forecast.

It may well be correct as a political observation. But the analysis that follows is conducted entirely without reference to the monetary system, which is an unusual omission in a piece that has just spent several paragraphs on bond markets.

Productivity growth in a monetary economy depends on investment. Investment depends on the availability of financing and on the existence of demand sufficient to make investment worthwhile. Both of those conditions are shaped by fiscal and monetary policy. A government running a surplus extracts demand from the private sector. A central bank holding rates high raises the cost of investment finance. Neither condition is conducive to productivity growth, regardless of what else is done to planning law, public ownership structures, or the composition of the Cabinet.

Munchau’s conclusion that public investment would actually harm productivity rests on the assumption that the economy is already at capacity — that government spending crowds out private investment rather than complementing it. In an economy with persistent output gaps, stagnant wages, and underemployed workers, that assumption requires a defence that the article does not provide.

What the Article Is Really Doing

Munchau is a more careful analyst than many who write in this space, and his piece contains several genuine insights: that Starmer’s failure was political rather than temperamental, that the Labour Party has largely abandoned serious economic thinking, and that productivity is a more honest metric than GDP. These observations are well made.

But the monetary framework underlying the piece is the same one that has dominated British economic commentary for fifty years: the government is financially constrained, the bond market enforces that constraint, and the only available question is how to appease it at acceptable political cost.

That framework is wrong. It was wrong when sterling floated in 1971 and it is wrong now. It is, however, extremely convenient for those who wish to argue that democratic governments should defer to financial markets, that the euro offers institutional shelter that sovereignty does not, and that the radical options are simply too dangerous to contemplate.

Munchau’s vigilantes are real enough as market participants. What they are not is a constraint on a UK government that has read its own legislation.

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