Opinion

Hugo Dixon

Capital markets union needs deregulation

Hugo Dixon
Sep 15, 2014 09:24 UTC

By Hugo Dixon

Hugo Dixon is Editor-at-Large, Reuters News. The opinions expressed are his own.

One of the biggest projects for the next European Commission, which takes office in November, will be to create a “capital markets union.” President-elect Jean-Claude Juncker last week gave Britain’s Jonathan Hill the task of creating such a union “with a view to maximising the benefits of capital markets and non-bank financial institutions for the real economy.”

The prime goal of capital markets union should be to develop healthy sources of non-bank finance that can fund jobs and growth. The European Union suffers from clogged up and fragmented capital markets, which are a fraction of the size of their U.S. equivalents. Changing this is vital because banks, especially in the euro zone periphery, are on the back foot and not able to finance a recovery on their own.

How exactly should this capital union be created? In some cases, no doubt, there will have to be new regulations. One of the ironies of creating any single market – and the capital markets union project can also be viewed as completing Europe’s single market in capital – is that rules have to be passed to break down barriers that balkanise the market.

But new rules are not the only answer. The main thrust of capital markets union should be about liberating, not controlling, markets. In pursuing this, some of the regulations put in place in the wake of the financial crisis will need to be revised because they are holding back non-bank finance.

Brexit risks have shot up

Hugo Dixon
Sep 9, 2014 09:31 UTC

Brexit risks have shot up in the past few weeks. The chance of Britain exiting the European Union by the end of the decade is now probably around 50 percent.

The main factor driving Brexit is the knife-edge referendum on Scottish independence. If the Scots vote next week to quit the United Kingdom, it is highly likely that the rump UK will leave the EU. If the UK doesn’t break up, it is much less likely that it will then part from the EU, but this is still a risk.

Financial markets are finally waking up to the risk of a “Scoxit” for the pound, gilts and the UK economy. They are also worrying about the knock-on effect in Spain, where the Catalan regional government wants to hold its own referendum on independence.

Gas and bank security have similarities

Hugo Dixon
Sep 8, 2014 09:56 UTC

Europe is currently conducting two stress tests. One is on its energy suppliers, to see how badly they would fare if Russian gas was disrupted. The other is on euro zone banks, to ensure they are strong enough to finance economic recovery.

It is hard to know which of the two is the more important. But it is clear that an effective regime for energy security requires many of the same elements as financial stability.

One is the need for credibility in the stress tests. Europe flunked its original bank assessments by modelling scenarios that weren’t sufficiently stressful. The new test being conducted by the European Central Bank looks more credible.

EU’s three big problems all linked

Hugo Dixon
Sep 1, 2014 09:19 UTC

The outgoing president of the European Council, Herman Van Rompuy, said at the weekend that his successor, Donald Tusk, currently Poland’s prime minister, faces three big challenges: the stagnating euro zone economy; the Ukraine/Russia crisis, which he described as the gravest threat to continental security since the Cold War; and the risk that Britain will quit the European Union. The problems are all linked.

Euro zone weakness is one reason the EU is reluctant to take action against Russia. GDP growth, already anemic, ground to a halt in the second quarter. The inflation rate has fallen again, to just 0.3 percent, and the unemployment rate is stuck at 11.5 percent.

With Italy in its third recession in recent years, Germany shrinking and France flat, this is no longer a crisis of what used to be called the “little PIGS” – Portugal, Ireland, Greece and Spain. It might be best to use a new acronym “FIG” to describe the travails of the big three.

Euro crisis is sleeping, not dead

Hugo Dixon
Jul 28, 2014 09:07 UTC

Euro zone policymakers may feel they can afford to relax this summer. That would be a terrible error. The euro crisis is sleeping, not dead.

The region is suffering from stagnation, low inflation, unemployment and debt. The crisis could easily rear its ugly head because the euro zone is not well placed to withstand a shock.

What’s more, it’s not hard to see from where such a blow could come. Relations with Russia have rapidly deteriorated following the downing of the Malaysia Airlines flight over Ukraine. If Europe imposes sanctions that make Moscow think again, these will hurt it too.

What is EU capital markets union?

Hugo Dixon
Jul 21, 2014 09:31 UTC

What is capital markets union? Jean-Claude Juncker, the European Commission’s president-elect, has embraced the goal of creating one for the European Union. But so far it is more of a slogan than a set of policy actions. There’s no harm in having a catchy term to encompass a myriad of specific plans, but the idea needs fleshing out.

The first thing is to clarify the goals. One is to finance jobs and growth throughout the European Union. Another is to have a financial system that is better able to absorb shocks. Banks are shrinking and so can’t do the job of funding economic expansion on their own. Nor are they good at coping with crises. Indeed, they often magnify them, as the credit crunch and euro zone saga showed.

The solution is to beef up non-bank finance – everything from shares and bonds to shadow banking and much else too. It is also to integrate further the EU’s capital markets. That will lead to greater critical mass and lower financing costs, as well as soften the blow of an economic shock by sharing the pain across a wider area provided risk is really transferred from bank balance sheets.

UK prepares for possible EU failure

Hugo Dixon
Jul 16, 2014 09:22 UTC

David Cameron looks to be preparing for the possibility that his plan to renegotiate Britain’s relationship with the European Union will fail. The UK prime minister would then campaign for the country to quit the EU in a referendum he plans to hold by 2017. That seems the best way to interpret his appointment of a eurosceptic foreign minister and the nomination of a little-known former lobbyist as Britain’s European commissioner.

This is not to say that Cameron wants to take Britain out of the EU – which would be a historical mistake. It is rather that he apparently thinks quitting could be an acceptable Plan B that would keep him in his job and his Conservative party reasonably united.

The British premier has never publicly said how he would campaign if he doesn’t manage to reform the EU and the country’s relationship with it. He used to dodge the question by saying he was confident of securing significant changes, while being fairly woolly about what reforms he was actually looking for.

How to fight UK immigration fears

Hugo Dixon
Jul 14, 2014 08:55 UTC

By Hugo Dixon

Hugo Dixon is Editor-at-Large, Reuters News. The opinions expressed are his own.

If the UK leaves the European Union, the main reason will probably be because people fear immigrants are overrunning the country. The best way of assuaging these concerns is to show how free movement of people within the EU benefits the economy and society overall, while acknowledging that some groups may be harmed and working hard to improve their lot.

So far, David Cameron’s Conservative-led coalition party has not done this effectively. The field has therefore been left open to the UK Independence Party, which wants to pull Britain out of the EU and which has cleverly fanned and exploited the native population’s fears about immigration.

Matteo Renzi is on a roll

Hugo Dixon
Jul 7, 2014 09:00 UTC

By Hugo Dixon

Hugo Dixon is Editor-at-Large, Reuters News. The opinions expressed are his own.

Matteo Renzi is on a roll. The Italian prime minister is a brilliant politician. His youthful dynamism has bought him time with his people, the markets and the European Union to carry out the immense job of reforming Italy. But he has yet to show he can execute. He now needs to, because even his time will run out.

Renzi has had a good four months in the job after he pushed aside his predecessor Enrico Letta. His emphatic victory in the European Parliament elections gave him a legitimacy that the murky manner of his ascension lacked.

EU would also be harmed by Brexit

Hugo Dixon
Jun 30, 2014 09:02 UTC

By Hugo Dixon

Hugo Dixon is Editor-at-Large, Reuters News. The opinions expressed are his own.

It is not just Britain which would be damaged if it quit the European Union. So would other members. Jean-Claude Juncker’s nomination as Commission president at last Friday’s summit increases the chance of Brexit – Britain’s exit from the EU. Leaders from all countries now need to work to limit the risk it happens.

David Cameron went out on a limb to block Juncker, and failed. The UK prime minister mishandled the diplomacy, notably by seemingly threatening to pull out of the EU if the former Luxembourg premier got the job.