Opinion

Hugo Dixon

How to pep up European growth

Hugo Dixon
Feb 27, 2012 09:27 UTC

Europe needs a growth strategy. In the short term, that means preventing an austerity spiral. In the long run, it means structural reform and a drive to create a genuine single market. The European Union summit this week is a chance to aim at both targets.

The euro zone crisis may be receding. Last week’s temporary fix of Greece’s problems with a 130 billion euro bailout is the most recent cause for optimism. But so long as the region cannot grow – and the European Commission has just forecast zero growth this year for the European Union as a whole and shrinkage for several countries including Italy and Spain – there is a risk of sliding back into crisis.

The European Central Bank’s provision of 500 billion euros of three-year money to the banks before Christmas – and the promise of a similar cash injection this week – has lifted spirits in financial markets. Some of that money will find its way into the real economy. But while monetary policy is lax, fiscal policy is tight. No fewer than 23 of the EU’s 27 countries are in what are known as “excess deficit procedures”, which require them to bring their annual borrowing down to less than 3 percent of GDP over the next year or so. Under the so-called “six pack” system of fiscal discipline, countries can be fined if they fail to stick to the required austerity.

Balancing budgets is a good idea. The problem is that, if overdone, austerity can drive economies deeper into recession. Taxes fall, meaning it is even harder for governments to balance their finances. If they then have to squeeze again, the economy just gets further squished. The rational approach would be to give governments such as Spain – which is especially vulnerable to this spiral – a little longer to cut their deficits provided they are genuinely dealing with their countries’ structural problems, for example by tackling excessively expensive pension systems and rigid labour markets.

There are some tentative signs that policymakers are coming round to such an approach. Mario Monti, Italy’s highly respected new prime minister, seems to have had some success in persuading Germany’s Angela Merkel that economic policy can’t be just about austerity. Meanwhile, the European Commission, which is responsible for policing the excess deficits, is equivocating about what to do with Spain.

How to help the Syrians

Hugo Dixon
Feb 20, 2012 09:17 UTC

When the Syrian revolution began, the activists employed almost entirely non-violent tactics. They also rejected the idea of foreign intervention. Nearly a year on, the revolution’s character has changed. There are still protests, boycotts, strikes and funeral marches. But the opposition’s main strategy for overthrowing Bashar al-Assad’s regime has become one of out-muscling it. To achieve that, it is calling for military help from abroad – a request that will be pressed when the Friends of Syria, a contact group of mainly Arab and Western countries, meet in Tunis later this week.

The switch in strategy is understandable, though regrettable. The endless killing and torture have taken their toll. Homs, Hama and several other cities are being bombarded by Assad’s forces in what look like medieval sieges and could have similar grisly outcomes. The people worry they will be massacred if they don’t take up arms to defend themselves. Meanwhile, they have seen how foreign military intervention in Libya tipped the balance there and got rid of Colonel Muammar Gaddafi.

The Assad regime probably likes the fact that the opposition has embraced armed struggle. This solidifies its support among its core constituency – the Alawites, who represent about 10 percent of the population – as well as other minorities such as Christians. The regime can argue it has to hit back hard, otherwise it will be massacred. What’s more, it has seen brutality work in the past. Assad’s father survived a rebellion in Hama 30 years ago after killing around 20,000 people.

Monti turnaround can go much further

Hugo Dixon
Feb 13, 2012 09:37 UTC

Mario Monti’s ability to take a crisis and turn it into an opportunity may one day be taught as a case study in political economy. When Italy’s technocratic premier succeeded Silvio Berlusconi last November, the country’s 10-year bond yield was above the 7 percent level that had driven Greece, Ireland and Portugal to seek bailouts. Now it is 5.5 percent – still high but moving in the right direction.

Countries with high debt levels like Italy – its borrowing is 120 percent of GDP – are prone to self-fulfilling prophecies on both the upside and the downside. If investors think a government will go bust, borrowing costs rise which, in turn, makes bankruptcy more likely. But if markets think it is solvent, borrowing costs fall and that means it’s unlikely to fail.

In Italy, where I spent much of last week, there have been spirals within spirals. One has been via domestic politics. Monti has so much credibility that he has been able to reform the pension system, liberalise a raft of monopolistic industries and launch a high-profile crackdown on tax evasion. That has helped cut Italian bond yields, further boosting his credibility.

How to end the banker backlash

Hugo Dixon
Feb 6, 2012 09:47 UTC

There was a whiff of the lynch mob in the UK last week. Stephen Hester, the current Royal Bank of Scotland boss, was bludgeoned by politicians and the media into foregoing his bonus even though he was brought in to clean up the largely state-owned bank. Two days later his predecessor, Fred Goodwin, was stripped of his knighthood. While Goodwin bore much of the responsibility for RBS’s near-bankruptcy, removing his title flouted normal procedures. Not only is such a dressing down traditionally reserved for criminals; the prime minister, David Cameron, prejudged the verdict of the committee which reviewed the knighthood. The week was capped off by the leader of the opposition, Ed Miliband, calling for a tax on bankers’ bonuses.

While the UK is currently the epicentre of the backlash against financiers, the phenomenon is widespread across the Western world. Francois Hollande, who is likely to be France’s next president, has said that his main adversary isn’t Nicolas Sarkozy but a faceless, nameless, opponent – the world of finance. And across the Atlantic, the only serious setback in Mitt Romney’s presidential campaign so far came when he revealed that in 2010 he had paid only 13.9 percent tax on his $21.7 million of income, most of which came from his time as a private equity baron.

There is certainly something ugly about the way politicians – who themselves bear some responsibility for the economic mess – have turned bankers into a scapegoats. But the public isn’t in the mood to show sympathy to bankers these days. The issue is not so much the amounts they are paid. In the same week that the banker backlash was gathering force in the UK, Facebook announced its initial public offering. Nobody batted an eyelid at the prospect of Mark Zuckerberg, the founder, being worth over $20 billion. The difference is that people think Zuckerberg deserves his billions but the bankers don’t deserve their millions.