Hugo Dixon Thu, 28 Jul 2016 09:55:41 +0000 en-US hourly 1 Stock markets too sanguine about Brexit Thu, 28 Jul 2016 09:55:41 +0000 The author is a Reuters Breakingviews columnist.  The opinions expressed are his own.

Financial investors seem to think the UK will settle easily into a new deal with the European Union. More likely there will be cabinet wrangles, tortuous negotiations with the EU, and an unsatisfactory conclusion.

The pound has suffered since Britain voted to quit the EU, falling 12 percent against the dollar. But stock markets have regained their poise.

The FTSE 100 is up 8 percent meaning that, even in dollar terms, it isn’t down that much. Even the more domestically-focused FTSE250 index of mid-cap companies has pretty much recouped all its post-Brexit losses.

Although the UK economy grew 0.6 percent in the second quarter, more up-to-date indicators are worrying. Retail sales suffered their sharpest fall in sales in four years, the Confederation of British Industry says manufacturers are more pessimistic than at any time since 2009, and the purchasing managers’ index has fallen to its lowest since early 2009.

In other words, the views of the stock market and those of the real economy aren’t in synch. Businesses are probably more on the ball. Consider the following.

Theresa May will struggle to get her cabinet to agree to a common line on what Brexit means. Although the prime minister campaigned to stay in the EU, she won’t find it easy to get the government to line up behind so-called “soft Brexit” – a deal that would allow Britain to retain reasonably good access to the single market, which is responsible for almost half its trade.

The reason is that Brussels will almost certainly insist, as a quid pro quo, that the UK continues to allow EU citizens to settle freely in Britain. That is anathema to many “hard Brexiteers” – including the ministers May has chosen to lead the divorce process as well as many lawmakers from her Conservative Party and supporters in the country.

It’s not clear how the prime minister will resolve this division at the heart of her government. But it will probably take many months and lots of arguments before she thrashes out a common position.

That’s one reason why May won’t trigger Article 50 of the Lisbon Treaty, opening formal divorce negotiations, until next year. Another is that she also needs to consult far and wide – listening not just to parliament but also to Scotland and Northern Ireland, both of which voted to stay in the EU and could be destabilised by Brexit.

In the meantime, the prime minister will find it hard to get a clear steer from the EU over what sort of deal it is prepared to offer. Brussels has said there will be “no negotiation before notification” under Article 50, even if that doesn’t stop informal talks.

Some officials think May won’t be ready to press the Article 50 button until around March of next year. But even then negotiations won’t begin in earnest because France will be heading into presidential elections and Germany’s general election will follow after the summer break.

Given rising euroscepticism, neither government will want to offer Britain any concessions until after these votes. There’s not much May can do to hurry them along either. If she has taken time to set out her negotiating position, the EU could reasonably say it needs many months to figure out its response which, after all, needs to be coordinated among 27 different countries.

When the talks finally get serious, probably in the final quarter of 2017, May will face another problem. There are actually two separate processes: quitting the EU and agreeing a new trading deal.

Brussels is currently insisting that the first process, which is supposed to last two years, must be finished before the second can start. It may relent on that view. But even then, few experts think the new deal could be completed in two years.

So the UK would probably leave the EU in, say, 2019 without a long-term trade arrangement. If it then had to fall back on its membership of the World Trade Organization, which does virtually nothing to open up trade in services, the economy would be badly hit.

Admittedly, there might be alternatives. One is that Britain might be able to stay in the single market for several years after leaving the EU while it negotiated a new long-term deal. But it would be hard for May to secure such a deal and, even if she could, it wouldn’t be cost-free.

Meanwhile, the UK couldn’t just gallivant around the world cutting trade deals with other countries. Trade deals interact with one another in a complex cat’s cradle-like structure. So it makes sense for Britain to finalise its arrangements with its prime trade partner, the EU, before nailing down other smaller deals. That’s what the top US trade negotiator, Michael Froman, seems to have told the UK’s international trade minister, Liam Fox, this week.

As financial investors come to grips with all this complexity, they may start to become as pessimistic as real businesses.

(Hugo Dixon is chairman of InFacts, a journalistic enterprise arguing for strong relations between Britain and the EU.)

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Follow Merkel on Brexit – and keep cool Mon, 27 Jun 2016 11:00:04 +0000 The author is a Reuters Breakingviews columnist.  The opinions expressed are his own.

Angela Merkel has set the right tone on Brexit. The German chancellor is keeping her cool, while other EU leaders including her own foreign minister are pressing Britain for a quickie divorce.

David Cameron, who resigned after the electorate voted to leave the EU on June 23, said he would not institute formal divorce proceedings. He would leave that to his successor as prime minister.

A new leader probably won’t be chosen until October. Given that Boris Johnson, the pro-Brexit former Mayor of London who is favourite to take over, hasn’t yet articulated an exit plan, the EU may need to wait a few months after that before Article 50 of the Lisbon Treaty is invoked, triggering the start of divorce talks.

“Quite honestly, it should not take ages, that is true, but I would not fight now for a short time frame,” Merkel told a news conference on June 25.

By contrast, German Foreign Minister Frank-Walter Steinmeier said, after a meeting with colleagues from five other EU states: “This process should get under way as soon as possible so that we are not left in limbo but rather can concentrate on the future of Europe.”

It’s understandable that EU politicians are angry with Britain. They feel they have bent over backwards to keep it in the club, only to be rejected.

It’s understandable too that they are afraid that Brexit could lead to a domino effect with other countries such as France, the Netherlands or Italy – where eurosceptic populism is rife – wanting to quit the EU too. They also fear that the uncertainty caused by the British voters’ decision could knock their fragile economies.

Although the rest of the EU almost certainly couldn’t force the UK to trigger Article 50, they might be able to make life difficult in other ways. But there is there is no need to do so as the immediate economic fallout looks manageable.

The main risk is that financial markets will fret that the euro zone will come apart and push up the borrowing costs of the weaker members. But the European Central Bank could handle that by launching a new bond-buying programme.

The most important task is to sever the unhealthy link between banks and sovereigns, as I have argued for many years. A recent development of this idea by Morgan Stanley’s Reza Moghadam is that the ECB could buy bonds directly from those banks that have excess exposure to the debt of particular countries. This would also give a boost to the most vulnerable large euro countries, Italy and Spain, as their banks are particularly exposed to their governments.

There’s also an upside in playing it cool: the UK could change its mind.

This, admittedly, doesn’t look likely at present. But, as the weeks and months progress, a backlash could build to the referendum outcome. A petition has already been launched calling for the result to be annulled. By the evening of June 26, it had gathered 3.5 million signatures.

There is, admittedly, nothing binding about this petition. On the other hand, the UK economy does seem likely to be worse hit by the uncertainty unleashed by the referendum than the rest of the EU. The pound has already fallen sharply. Prices will rise and so may unemployment.

When the next prime minister spells out his or her exit plan, voter dissatisfaction may grow. It will then become clear that many of the promises made by Johnson and other Brexiteers – notably that it would be possible to get easy access to the EU’s single market while at the same time ending the right of EU citizens to come to Britain – are inconsistent.

None of this is certain. But, if the UK does change its mind – which would need to be validated by the people in a democratic process, such as a general election or a new referendum – the benefits to the rest of the EU are big. For a start, it would avoid the economic dislocation caused by an actual Brexit. This could be serious given that Britain is the EU’s second largest economy.

Even more important, a British U-turn would spike the guns of populists in other countries. Merkel, France’s Francois Hollande, Italy’s Matteo Renzi et al could turn round to their voters and say: “The British looked over the abyss, didn’t like what they saw and pulled back.”

Those who think this is fanciful should remember other countries have changed their minds following referendums on EU matters. The Irish, for example, voted to reject the Lisbon Treaty in 2008 only to reverse their decision after some concessions the following year. A similar scenario played out in Athens just a year ago. The Greek people voted in a referendum to reject a bailout plan offered by the euro zone. But, within days, Alexis Tsipras, the prime minister, was begging his euro partners for a new deal.

Now the UK economy is much stronger than the Greek one. And Britain is not subject to the strictures of the euro zone. So the analogy is not exact. But there is enough of a parallel to give EU leaders pause for thought when they convene in their various configurations over the next few days. If they play it long and cool, they may yet bring this recalcitrant member back into the club.

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Dixon: Why I’m voting to remain in Europe Thu, 16 Jun 2016 17:30:07 +0000 The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Until about five years ago, I didn’t give much thought to whether Britain should stay in the European Union – because quitting didn’t seem like a realistic prospect. Insofar as I did consider the matter, I had a vague feeling that we were better off in than out – but knew I would need to delve into the topic to understand why that was so.

In the early part of the century, I was too busy setting up Breakingviews to do this. Our initial focus was on the dotcom bubble and corporate finance. We didn’t do much macroeconomics, let alone politics. For example, we sat out of the debate over whether Britain should join the euro.

But during the credit bubble, our focus changed. We worried that the financial system was getting over-leveraged. When the crunch actually came, the story became banks, macro and crisis – and the political response to all that.

The credit crunch mutated into the euro crisis – during the early days of which we sold Breakingviews to Thomson Reuters. I immersed myself in the Greek crisis. I now saw myself as a political economist rather than a financial journalist.

Freed of a day job, I also wrote a book about whether we should stay in the EU. After David Cameron declared himself in favour of a referendum during a speech in January 2013, it was clear that this was going to be the big political issue of the coming years.

My initial focus was on the economic arguments – in particular, the line that we could stay in the single market while quitting the EU. But the more I examined it, the more I realised that none of the alternatives for trading with the EU – such as the Norwegian and Swiss options – were any good. They involved less access to the single market, while moving from being a rule-maker to a rule-taker.

I also became aware of the ghastly phrase, “non-tariff barriers” – the panoply of regulations that gum up trade, especially in services. The EU’s original common market was about removing tariffs. The move to create a single market since 1992 has been about dismantling non-tariff barriers. Trade liberalisation in the 21st Century will be almost entirely about further getting rid of rules that stop commerce because most tariffs have already gone.

The more I thought about this, the more I realised how Britain, whose economy is 80 percent services, has a huge amount to gain from EU projects like capital markets union and the digital single market. These will extend the single market to the liveliest industries of the future, where Britain excels.

We’d also be hurt if we lose full access to the single market. For example, the City would no longer have a passport to operate freely across the EU. It would suddenly face a massive “non-tariff” barrier.

I still think the economic case for staying in the EU is powerful. But over the past year or so, geopolitical considerations have played an even bigger role in my thinking. Consider the boiling cauldron of the Middle East and North Africa. Unless we find a way of stabilising this region, Europe will be troubled too. We can’t just pull up an imaginary drawbridge.

The idea that Britain can do anything useful about this if we quit the EU is pie in the sky. Surely we have learnt – from our wars in Iraq and Libya, and from Angela Merkel’s unilateral offer to Syrians to come to Germany – that when Europe is divided, our interventions will cause more trouble than good.

There’s even a risk that Brexit will lead to the breakup of both the UK, with Scotland going its own way, and the EU. How can that make us safer and stronger? The possibility that Donald Trump, an anti-NATO bully, may be the next U.S. president makes me all the more keen to stay in the EU.

By contrast, if we remain, we can be one of the EU’s leaders. We can help devise a joined up economic and political plan to settle the Middle East and North Africa. There are no quick fixes. But surely we must try.

As the referendum campaign has progressed, another consideration has weighed on me. The Leave camp has been running a campaign of misinformation – telling the voters that we send £350 million a week to Brussels – when we don’t – and that Turkey is scheduled to join the EU in 2020 – when it isn’t.

If Britain votes to leave, post-truth politics will have triumphed – polluting our democracy. We must fight that with every sinew.

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Fiscal union has no place in EU Brexit plan Tue, 07 Jun 2016 10:08:15 +0000 The European Union’s knee-jerk reaction if the UK votes to quit the club will be to integrate further – in particular, to charge full steam towards fiscal union. After all, “more Europe” is the EU’s typical response to a crisis.

But such a move would be politically foolish, provoking a populist backlash. Britain isn’t the only EU country where euroscepticism is running high. Think of France’s Marine Le Pen, Italy’s Beppe Grillo and Germany’s Alternative for Germany (AfD). A better response would be for the EU, especially the euro zone, to loosen fiscal policy while supercharging economic and market reforms.

The possibility of a Brexit cannot be ignored. With just over two weeks before the British people vote on June 23, a poll of polls compiled by NatCen Social Research has 51 percent for Leave and 49 percent for Remain. Ladbrokes on June 7 put the probability of Brexit at 29 percent.

If Britain votes to leave the EU, it’s not just the UK economy that would suffer. The divorce process and reduction in trade flows would harm the rest of the EU. Other countries, therefore, need a contingency plan – to cushion the impact. A possible plan B is fiscal union for the euro zone. After all, the conventional wisdom is that the absence of budgetary union was to blame for the euro crisis.

But while almost everybody who wants fiscal union agrees it should have a euro zone finance ministry, there’s little consensus beyond this. Germany and some northern countries would like to be able to tell profligate southern countries how to run their budgets. Southern countries would like northern ones to help them fund their budgets.

Even if the shock of a Brexit vote forced the elites to put aside their differences, they would struggle to sell fiscal union to their people because this would involve a transfer of sovereignty away from national parliaments to Brussels or Frankfurt. Some countries would have referendums to approve such plans. The process of seeking ratification could be so politically toxic that it might cause the EU to blow up.

The EU needs a better plan B. This would be a more ambitious version of the plan outlined by Mario Draghi, president of the European Central Bank, in his Jackson Hole speech in 2014: looser macroeconomic policy supported by structural reforms.

With interest rates in negative territory, the central bank is, using Keynes’ analogy, pushing on a piece of string. It would be sensible to change the ECB’s mandate so that its goal is to hit an inflation rate of 2 percent rather than keep it below but close to 2 percent – a target that hard-wires deflationary bias into the system. But given looser monetary policy would have limited effect at present, a higher priority is looser fiscal policy – in particular, more freedom for governments to borrow to invest.

Berlin has, in the past, been hostile to both monetary and fiscal laxity. However, its position could shift after a Brexit vote, particularly if other countries are prepared to embrace more reforms to boost their productivity. Such reforms are needed at a national level – to free up labour and product markets, stamp out tax evasion and corruption, and streamline bureaucracy. The euro crisis has already prompted Ireland, Greece, Spain, Italy and others to take such action, although more is needed.

Action to improve productivity is also needed at an EU level – mainly to complete its single market. Again, moves are already afoot – notably to create a digital single market, a capital markets union and an energy union. But these initiatives need to be brought to fruition.

Finally, the euro zone needs to complete its banking union. The euro crisis exposed a so-called doom loop connecting over-indebted banks and governments. When the banks got into trouble, their governments had to bail them out. And when states borrowed too much, banks that had lent them money also got in trouble.

Banking union has tried to sever the first part of this loop by requiring banks’ investors rather than taxpayers to support them if they need more capital. But it has failed to sever the second half of the loop – the exposure of banks to over-borrowed governments. Cutting this link without provoking a renewed crisis will be hard but needs to be part of the euro zone’s medium-term plan.

All these measures – more investment financed by borrowing, a symmetrical inflation target for the ECB, market reforms at a national level, completing the single market, and finishing banking union – would be desirable if Britain voted to stay in the EU. Indeed, the UK would itself benefit greatly from the completion of the single market. However, in the event of Brexit, the EU should push forward along these lines with extra energy rather than racing headlong into the blind alley of fiscal union.

(Hugo Dixon is chairman of InFacts, a journalistic enterprise arguing that Britain should stay in the EU.)

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Vote to quit EU could tip UK into recession Mon, 18 Apr 2016 08:57:50 +0000 The author is a Reuters Breakingviews columnist.  The opinions expressed are his own.

A vote to quit the European Union could tip the UK into recession. This is no longer an academic possibility. Opinion polls show British people evenly divided on whether they want to remain in the EU or leave; betting odds suggest there is a one in three chance that the pro-Brexit camp will prevail in the June 23 referendum.

Such a vote would trigger political turmoil and acrimonious divorce talks. Investment would grind to a halt as firms wait for the fog to clear. Consumer confidence could also be hit.

The long-term impact of a vote to leave the EU would also be damaging. After all, the EU accounts for half Britain’s trade. It would be impossible to retain full access to that market if the Leave camp sticks to its goal of ending free movement of people between the EU and the UK and stopping budget contributions to Brussels. This “has never happened in Europe”, Klaus Regling, head of the European Stability Mechanism, was quoted by the FT as saying at the International Monetary Fund meetings last week. The UK government is predicting the economy will be 6 percent smaller by 2030 than if it stayed in the bloc.

But it is the short-term impact of a Brexit vote that will be at the forefront of investors’ minds. This is likely to be nasty.

For a start, David Cameron, who is campaigning for Britain to stay in the EU, would probably have to resign as prime minister. Boris Johnson, the popular mayor of London who is campaigning to quit, would be in pole position to replace him.

Wolfgang Schaeuble, the German finance minister, told his British counterpart, George Osborne, at the IMF meetings that the divorce talks would be tough, according to the FT. There are several reasons to believe this.

One is that the UK’s partners wouldn’t want other EU countries to think it was easy to quit. Otherwise, the whole bloc might unravel as, say, the French said they didn’t want to abide by competition law, the Italians said they wouldn’t stick to the budget rules, and so forth.

Another reason is that some countries would want to use Brexit to grab business that until now has been transacted by the UK. The French economy minister has already promised to roll out the red carpet to bankers. The way to do that would be to stop Britain having full access to the EU market.

Yet another reason is the electoral timetable. French presidential elections are held in May next year, while the German federal election is next autumn. Neither government would want to give an inch to Britain before those were out of the way.

The pro-Brexit camp disagrees. It says the EU would be desperate to do a trade deal because it sells more to the UK than vice versa. The snag is that this argument ignores proportionality. Exports to the EU account for 13 percent of UK GDP; exports from the EU to Britain account for just 3 percent of its GDP. As such, the UK needs the EU more than the bloc needs Britain.

What’s more, if worst came to worst, the EU could fall back on World Trade Organisation trading terms. These limit the tariffs Britain could impose on imports of goods from the EU. Unfortunately, the UK’s comparative advantage is in services, including financial services, and the WTO does virtually nothing to protect its exports of these.

If the Leave camp was preparing the electorate for tough times ahead, that would be bad enough. But its wild promises about how easy it would be to clinch a deal with the EU mean the negotiations could be especially bitter.

Britain’s post-Brexit government would be in some ways like the radical left-wing party Syriza just after it took power in Greece last year. It would have made promises it couldn’t deliver. And, because it would be hard to tell the British people that they had been conned, the new administration would probably respond by taking a confrontational approach to the EU and blaming its former partners.

Such a government would also be under tight deadline pressure. The EU’s divorce process is set out in Article 50 of the Treaty. This says a deal has to be done within two years of the article being triggered, or Britain has to leave without any agreement.

If little was achieved in the first year because of the French and German elections, the heat would be on. The deadline could be extended with the unanimous approval of the other 27 countries. But, as the Greeks have discovered, negotiating with one’s back to the wall isn’t fun.

Unsurprisingly, the IMF predicts the divorce talks “would likely be protracted… resulting in an extended period of heightened uncertainty that could weigh heavily on confidence and investment.” Equally, 31 out of 35 economists polled by Reuters think Brexit would hurt the economy. None of them think it would be good. They are right.

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Greece’s problems could become Britain’s Mon, 04 Apr 2016 08:13:01 +0000 The author is a Reuters Breakingviews columnist.  The opinions expressed are his own.

Two of the European Union’s biggest risks – Greece’s bailout and the UK vote over EU membership – may collide this summer. Hellenic financial struggles and British soul-searching over whether to stay in the union may seem to have little to do with one another. They are, after all, occurring at opposite ends of Europe.

However, the International Monetary Fund and the EU are at odds over Greece’s bailout, something graphically highlighted by what WikiLeaks claims is a leaked transcript of an internal IMF call. If they can’t resolve their dispute quickly, Athens could run out of cash in July. The sense of crisis would be mounting just as the UK votes on June 23 on whether to remain in the EU or leave it.

Britain isn’t in the euro zone and doesn’t have to contribute to Greek bailouts. So logically, there should be no connection. But British eurosceptics would exploit the sense that Greece was back on the brink of bankruptcy to argue that the UK should put clear water between itself and the EU. They are already successfully exploiting Europe’s refugee crisis for the same purpose, even though the UK is not part of the border-free Schengen Area.

If everything had gone according to plan, the first review of Greece’s latest 86 billion euro bailout would have been completed. Athens would have got extra cash to deal with its immediate needs. Its creditors would also have agreed to “reprofile” its medium-term debt repayment obligations so that it wouldn’t face difficulties from 2022 onwards.

By now, the European Central Bank would also have included Greek debt in its quantitative easing programme, and, as a result, bond yields would have dropped. Even more importantly, the country’s banks would be on track to borrow long-term money at negative interest rates from the ECB to lend to companies and households, under its targeted long-term refinancing operations. All this would have put the economy on the road to recovery.

This rosy scenario has not materialised. Part of the explanation is foot-dragging by the left-wing government led by Alexis Tsipras. It has been slow to come up with proposals for tightening medium-term fiscal policy to hit a targeted 3.5 percent primary surplus in 2018. It also isn’t keen on structural reforms to boost the economy’s long-run productivity, in particular to let banks sell their vast backlog of non-performing loans so they can concentrate on new lending.

However, the main reason why the bailout review hasn’t been completed is that the IMF and the European Commission are at loggerheads over what is needed. The IMF is both more hawkish and more dovish.

The fund thinks that if no new measures are taken, Greece will have a 1 percent primary deficit in 2018 – that is, before interest payments are taken into account. The commission expects a surplus of around 0.5 percent. As a result, the IMF believes Athens needs fiscal measures equal to 4.5 percentage points of GDP to hit the 3.5 percent 2018 target, while the commission argues 3 percentage points would do the trick.

On the other hand, the fund also thinks it would be impossible and counterproductive to inflict another 4.5 percentage points of austerity on Greece. It is arguing that 2.5 points is the most the country can take.

The snag is that, on the IMF’s figures, this would mean Greece would only achieve a 1.5 percent primary surplus in 2018. That, in turn, would mean that its euro zone creditors would have to be more generous in relieving the country’s debt load so that it is sustainable in the long run.

One way of resolving the impasse would be to kick the IMF out of the Greek programme, as the government wants. It may seem odd that Tsipras wants to get rid of an institution that is arguing for more debt relief. But he is less concerned with the details of a debt deal that won’t kick in until the next decade than with getting a deal done fast. The premier presumably thinks this would revive his fast-fading popularity.

Tsipras will struggle to get the IMF monkey off his back, because Germany has been insistent that the fund stays in the game. Even if Angela Merkel wished to change her mind, the Bundestag parliament would be hostile to the idea. True, Germany doesn’t want to let Greece wriggle out of its commitment to a 3.5 percent surplus, and is reluctant to consider debt relief it actually agreed to last year. But it likes the fact that the IMF is stricter on structural reforms and making sure the numbers add up than the commission.

Hence, the dilemma posed by a top IMF official in the WikiLeaks transcript: “Look, you Mrs. Merkel you face a question, you have to think about what is more costly: to go ahead without the IMF, would the Bundestag say ‘The IMF is not on board’? or to pick the debt relief that we think that Greece needs in order to keep us on board?”

Maybe Merkel can decide which way to jump in the next few weeks. If so, the Grexit risk can be defused before the Brexit referendum. Maybe, too, some fudge can be found that stops Greece going bust in July but postpones the real decisions until after the UK votes. If not, the two risks could clash horribly.


Hugo Dixon is chairman of InFacts, a journalistic enterprise arguing that Britain should stay in the EU.

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Turkey deal offers a lot – if it sticks Tue, 08 Mar 2016 12:05:54 +0000 The author is a Reuters Breakingviews guest columnist. The opinions expressed are his own.

The European Union’s bold deal with Turkey to stop the disorderly flow of migrants to Europe offers a lot – if it sticks.

Not only would it help keep Britain in the EU and Greece in the euro. It would shore up German Chancellor Angela Merkel’s position, and so help stabilise the EU. It would also avoid the collapse of the Schengen Area, which allows border-free travel throughout most of the bloc.

The provisional deal, which emerged on March 8, is more extensive than originally envisaged. Turkey will take back any “irregular migrants” crossing to Greece, including Syrian refugees. In return, the EU will accept an equal number of Syrians to those who come to Greece but are then sent back to Turkey.

Critically, these will not be the same people who attempt the boat trip across the Aegean. Instead, refugees will be taken directly from Turkey in a more orderly process. This should cut the incentive for people to make the dangerous crossing, putting their lives in the hands of people-smugglers.

Turkey also will get a series of other goodies: visa-free travel for its citizens to come to the Schengen Area from the end of June; extra cash on top of the 3 billion euros so far promised so it can better look after the millions of refugees who will stay in Turkey; and the energisation of talks to admit the country to the EU.

A lot of detail needs to be filled in. In particular, it is unclear how Syrians who are brought to the EU in an orderly fashion will be divvied up between the different members of the bloc. Given that several countries won’t want to take any – or at least not many – bitter wrangling could yet cause the deal to fall apart.

Meanwhile, right-wing nationalists won’t be happy with either visa-free travel for 79 million Turks, many of whom are Muslim, or the possibility that the country will eventually join the EU – even though that still seems a remote prospect that may never materialise. Nevertheless, movements such as France’s Front National and Germany’s Alternative für Deutschland will have new sticks with which to beat their nationalist drums.

That said, if the deal is finalised, perhaps as soon as another summit on March 17, there will be important economic and financial benefits.

First, the perception that the EU is finally getting a grip on the migrant crisis will undermine one of the strongest arguments used by those campaigning for Britain to quit the EU in a referendum set for June 23. Insofar as the Brexit risk is cut, that will reduce one of the main current concerns in financial markets. The UK is a big winner from the mooted deal because it has opted out of most of the EU’s migration policies and so won’t be required to take a quota of refugees. And since it is not in the Schengen Area, the offer of visa-free travel to Turks won’t impact it.

Another big winner would be Greece. It has been at risk of being turned into a giant refugee camp as other countries north of it have tightened border controls. The political fallout could in turn have exacerbated its economic crisis. Even with this deal, Greece will face multiple difficulties, but there’s less risk of them spinning out of control and tipping the country out of the euro.

Merkel also would be a winner. She has taken a lot of heat at home in the past few months for her previous open-door approach to Syrian refugees. If she can now show things are coming under control, she may be able to restore her authority. That would be good for the stability of the EU in general, given that she is its most important leader.

The EU and its member states would, of course, face a financial cost. In addition to the money sent to Turkey, Greece would get cash to help manage the refugees on its territory. An even bigger cost would be looking after refugees settled in the EU as part of the orderly process.

Set against that, borders would no longer need to be erected in the Schengen Area. Such a scenario would gum up trade and tourism. The cost of that could be 100 billion euros a year by 2025, according to analysis by the French government. And, eventually, Syrian refugees could play a valuable role in the economies of the countries where they settle – although it remains to be seen how well those who come will integrate in their new homes.

There are of course many ifs and buts in this scenario. Some people also will rightly worry that the EU is turning a blind eye to Turkey’s abuse of press freedom and rule of law in its desperation to cut a deal on migrants. Nevertheless, from an economic perspective, the provisional deal reached in the early hours of March 8 has much to offer.

Hugo Dixon is chairman of InFacts, a journalistic enterprise arguing that Britain should stay in the EU.

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Dixon: Investors yet to price in Brexit risks Sun, 21 Feb 2016 19:08:43 +0000 Hugo Dixon is chairman of InFacts, a journalistic enterprise arguing that Britain should stay in the EU. He is a Reuters Breakingviews guest columnist. The opinions expressed are his own.

Now David Cameron has clinched his deal to renegotiate Britain’s relationship with the European Union, the British people will vote on whether to stay in the union in a referendum on June 23. While the chance of Brexit looks less than 50:50, the economic consequences could be severe if the electorate does decide to pull out of the bloc.

The opinion polls suggest a high Brexit risk. NatCen’s poll of polls puts “remain” on 52 percent, just a nose ahead of “leave” at 48 percent.

But the contest is probably not quite that close – not least because Cameron has barely started campaigning in favour of staying in the EU. Nor has his cabinet, which has split 17 for remain versus five for leave.

On the other hand, Boris Johnson, the popular mayor of London, confirmed on Feb. 21 he would be supporting the campaign to leave the EU. This is a huge shot in the arm for the leave campaign — which is divided into two warring groups with different visions about what “out” would look like and whose most prominent figure was previously Nigel Farage, the leader of the UK Independence Party, who turns off more people than he attracts.

What’s more, many things could go wrong for the “remain” camp. Most obviously, the British people may think it is best to quit if, as seems likely, there is another surge of migrants from the Middle East and northern Africa into Europe this spring. Even though few are entering Britain and Brexit might expose the UK more to the refugee crisis, the “leave” camp is arguing the opposite.

Voters might also easily ignore what the political elite tell them is in their interests. They have done that in referendums in other EU countries in the past – for example, when the French voted against a proposed European constitution in 2005.

A better gauge of the chance of Brexit than opinion polls are probably the odds offered by betting agencies. The implied probability was 28 percent on Feb. 20, according to Ladbrokes, though that hadn’t yet reflected Johnson’s decision.

What such betting doesn’t show is the damage that would occur in the event of Brexit. The currency markets, though, do offer a glimpse. In the past three months, as the perceived probability of Britain quitting the EU has risen, sterling has fallen 9 percent versus the euro. If the UK actually left, the pound would probably drop further.

In analysing the economic impact, it is useful to distinguish the new steady state post-Brexit from the process of getting there.

The new equilibrium would be less advantageous compared to the current situation because Britain would struggle to gain as good access to the EU’s single market. Without that, the UK’s long-term growth prospects would be lower.

While the UK could, in theory, copy Norway – which has access to the single market while not being in the EU – it seems unlikely to go for such a model. After all, it would have to apply the rules of the market without a vote on them, as well as allow free movement of people. It would be hard to sell such a deal to an electorate that had just voted to quit.

If the new steady state is less attractive than the status quo, the transitional process could be even more damaging. For a start, the divorce could be acrimonious, with each side under pressure from its own people not to give ground. Given that Britain does nearly half its trade with the EU while only 14 percent of the bloc’s trade is with it, the UK would have more to lose from a bustup.

What’s more, a vote to leave the EU could trigger political turmoil in Britain. Though Cameron says now that he would stay on as prime minister if the people voted to quit, the pressure on him to resign would be enormous. Johnson would be best placed to succeed him.

If the economy took a dive after the referendum and the Tories tore themselves apart in a bout of bloody infighting, there is even a chance that Jeremy Corbyn, leader of the opposition Labour Party, could emerge as prime minister in the 2020 general election – a scenario few now take seriously. Given Corbyn’s unreconstructed socialist economic policies, markets would take this badly.

Quitting the EU could therefore lead investors to attach a risk premium to UK assets, as Mark Carney warned last month. The governor of the Bank of England said that Brexit could test “the kindness of strangers” given that Britain relies on foreigners to fund its current-account deficit, which is forecast by the European Commission to reach 5 percent of GDP last year.

Despite sterling’s fall in recent months, it doesn’t seem that the markets are pricing in such tail risks.

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How to rehabilitate capitalism Mon, 01 Feb 2016 09:05:01 +0000 The author is a Reuters Breakingviews guest columnist. The opinions expressed are his own.

Capitalism is under attack. Witness the popularity of Bernie Sanders, the socialist running neck-and-neck in the opinion polls with Hillary Clinton for the Democratic caucuses in Iowa being held on Feb. 1. To rehabilitate the system of free enterprise, it needs to be buttressed by a modern conception of fairness.

Viewed from Mars, capitalism has been a huge success. Free enterprise has generated wealth and removed hundreds of millions of people from poverty. But viewed from Earth, what often stands out is how many have been left behind by the march of globalisation and technology, while others have got ahead by methods more foul than fair.

The classic left-wing response to the perceived unfairness of capitalism has been to tax and spend. That doesn’t work well. High taxes can sap entrepreneurial spirit, while high welfare spending can leave poorer people dependent on hand-outs.

Just because the classic response has been tried and failed doesn’t mean it won’t be tried again. The success of left-wing populists such as Greece’s Syriza party and the election of Jeremy Corbyn as leader of Britain’s Labour Party show that such ideas still have appeal.

This makes it important for centrists – whether they consider themselves left-wing progressives, radical centrists or liberal conservatives – to articulate a credible middle road. This should be based less on a view that fairness is the same as equality and more on the idea that people should get a fair crack at a good standard of life.

There are two main aspects. First, it is important to tackle the foul methods by which people and companies get ahead – and, in the process, make it tougher for hard-working honest people to make progress.

One example of this is evading or avoiding tax. This is rife in some countries, such as Greece. But it is a global problem that makes people furious everywhere. Consider the anger in January in the UK over how Google, the internet giant, was seemingly able to run rings around the authorities and pay what looks like a tiny amount of tax.

Corruption, which is again widespread across the world from Asia to Latin America and pretty much everywhere in between, also sticks in the craw. Sweetheart deals between politicians and business line the pockets of the few to the detriment of the many.

Another justified target of ire is the existence of markets that favour insiders at the expense of the general public. Finance is top of the list. The global financial crisis exposed how many bankers had a one-way bet: during the good times, they raked it in; during the bad, the state picked up the pieces. This was a mockery of how capitalism is supposed to work.

Monopolies and vested interests are yet another source of resentment. Sometimes, the culprits are the big oligarchs who pull the strings in government to get the rules written in their favour, by giving bribes to politicians or senior officials.

But often the beneficiaries of vested interests aren’t particularly rich or powerful as individuals. Greece is one of the best examples of the phenomenon. Over decades, it perfected the art of doling out special privileges to such an array of groups – farmers, notaries, pharmacists, civil servants, teachers and ordinary pensioners as well as shipping magnates – that its economy gummed up.

Such practices sap entrepreneurial spirits but they do so by locking people out of opportunity rather than by using the methods of old-fashioned socialism. They also inflict bigger taxes on honest citizens and higher prices on consumers.

A modern conception of fairness would put an assault of foul methods at its heart. But it would do more than that.

Although successful societies need welfare states, most of Europe’s need refocussing. Part of the problem is that too much government spending is directed to what Europeans call the middle class rather than the needy.

The situation varies from country to country but the main goodies are generous state pensions for middle-to-high earners and tax breaks that benefit relatively well-off people. To be fair, some countries are reining these in. For example, the UK no longer offers such attractive incentives for rich people to save for their retirement. But, in many countries, there is a lot that could be done.

The money saved from funding this “middle class” welfare state could then be redeployed where it is needed. The priority will often be to invest in schools so kids get a fair start in life – and in adult education so that older people whose skills become obsolete as a result of technology can retrain.

Such a conception of fairness is not really new. It has a lot in common with classic liberalism. Nor is it dead. Successful politicians around the world – such as India’s Narendra Modi with his fight against corruption or Matteo Renzi with his willingness to confront vested interests – are deploying some strategies from this playbook.

It is a rich source of ideas with which to tackle the unfairness of capitalism without falling for the inefficiency of socialism.

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EU’s latest challenge – rule of law Mon, 18 Jan 2016 09:45:38 +0000 The author is a Reuters Breakingviews columnist.  The opinions expressed are his own.

As if the European Union didn’t have enough to worry about. Its latest concern is that the Polish and Greek governments may be flouting the rule of law.

The flood of refugees, the risk that Britain may quit the EU and the euro crisis are bad enough. But if countries in what is supposedly a club of liberal democracies undermine the rule of law, it contravenes a core value. What’s more, if people can’t rely on the rule of law, it is bad for investment.

The Polish situation has garnered the most headlines. Last week, the European Commission started a preliminary assessment of whether its new right-wing nationalist government was complying with the rule of law.

This was partly because the government passed a law in December requiring the country’s constitutional court to secure a two-thirds majority for most of its rulings, rather than a simple majority. Critics said this neutered the court as a check on government power.

Then, earlier this month, the government pushed through a law giving it the power to appoint the heads of state-run broadcasters. The next day it parachuted a former parliamentarian from its own party to run state television.

Poland seems to be following a playbook pioneered by Hungary, whose nationalist government cut the power of its top court and undermined the independence of its central bank earlier in the decade. Viktor Orban, the Hungarian prime minister, said last week he would block any sanctions against Poland.

The EU is founded on a series of principles that include democracy and the rule of law. When a country flouts these values, the Union can in extremis remove the government’s voting rights.

Although the Commission has only started a preliminary investigation, this has already provoked a war of words. One Polish minister compared EU “supervision” to the Nazi occupation in World War Two.

Investors have reacted badly. The zloty fell to a four-year low versus the euro on Jan. 15 after Standard & Poor’s cut the country’s credit rating, saying the government had weakened the independence of key institutions.

Now look at Greece. The chief executive of Piraeus Bank, the country’s largest, resigned on Jan. 15 after rumours that the leftist Syriza government had put pressure on him to quit via the head of the Hellenic Financial Stability Fund, the country’s bank holding company. The bank’s shares fell 22 percent in two days.

When these rumours started circulating, Paulson & Co, a hedge fund that owns more than 9 percent of Piraeus, wrote to the HFSF to complain. It said it had invested in the bank in last month’s rescue share issue on the understanding that Anthimos Thomopoulos, an executive it rated as “highly capable”, would stay as chief executive.

Paulson argued that the HFSF would not have the authority to request the chief executive’s resignation and that, if it had delivered such a request on behalf of the government, it “would clearly have been in violation of the laws governing the HFSF and, in particular, safeguarding its independence from political interference.”

The HFSF put out a statement on Jan. 14 denying it had made any such request. Later that day, the Eurogroup of euro zone finance ministers made clear that it wanted Greece to depoliticise its banks and public administration. Despite this, the following day Thomopoulos resigned.

Given that the euro zone has lent Athens vast sums of money (some of it to recapitalise Piraeus Bank) and the European Central Bank is now the bank’s supervisor, the creditors need to get to the bottom of what happened.

There are also other worrying signs that the Greek government of Alexis Tsipras may be flouting the rule of law. Last year, it sacked the head of the supposedly independent tax authority. It also passed a law giving the government more control over television.

Kyriakos Mitsotakis, who was elected leader of the opposition earlier this month, said there was an attempt “to control the justice system, to tamper with independent authorities, to stuff the state with friends and family, and to roll back reforms in education.”

When Tsipras fired the tax boss, Greece’s euro zone creditors barely murmured, despite the fact tax evasion is one of the country’s biggest problems. The European Commission seemingly didn’t want to be too harsh on the government because it wants to believe that its latest 86 billion euro bailout plan is working.

But respect for the rule of law is probably even more important for Greece’s economic future than balancing budgets and freeing up markets. It is also important for Poland’s economy.

The EU is in a quandary over how to respond. It doesn’t want to pick more quarrels when it is already fighting battles on multiple fronts. But if it turns a blind eye, bad behaviour could spread.


Hugo Dixon is chairman of InFacts, a journalistic enterprise arguing that Britain should stay in the EU.

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