Opinion

Hugo Dixon

Europe’s self-help

Hugo Dixon
Jan 23, 2012 03:42 UTC

The euro zone shouldn’t rely on a bailout from the rest of the world. The International Monetary Fund is asking for an additional $600 billion to help deal with the euro crisis. But the euro zone, which is vastly richer than most of the rest of the world, should find the money to solve its own problems. It will be bystanders in the developing world that may need help if the euro blows up.

One can see why the IMF wants more money. An additional $600 billion on top of its existing firepower of $390 billion would take it up to a nice round number of $1 trillion. Not only would that give its bosses more swagger as they crisscross the world fighting fires but it would allow the IMF to play a big role in any bailout of a large euro zone country such as Italy.

But why should the rest of the world bail out the euro? The rich normally help the poor. But GDP per capita in the euro zone was $33,819 in 2011, more than five times that in the developing world, according to the IMF. As things stand, 57 percent of the IMF’s existing loans are to the euro zone, according to the Center for Economic and Policy Research. It’s not surprising that other countries are hardly rushing to funnel yet more money its way.

Developing countries need to look after themselves. As the World Bank’s report on Global Economic Prospects highlighted last week, the developing world is already suffering from the euro crisis – mainly because capital flows shrank by 45 percent in the second half of last year compared with the previous year. If the euro blows up, developing country GDP would be knocked by 4.2 percent, it predicts. Some 30 countries, which have external funding needs of more than 10 percent of their income, would be especially vulnerable.

The caution over providing more cash to the IMF is not due only to the fact that relatively poor countries are being asked to help rich ones. The United States and Britain are also reluctant to contribute. This is partly for political reasons: It’s impossible to persuade Congress to cough up money for the IMF in an election year when the U.S. deficit is nearly 10 percent of GDP; and it’s not that easy to get the British parliament, with its large contingent of euroskeptic MPs, to do so either.

Europe’s Sisyphean burden

Hugo Dixon
Jan 16, 2012 10:43 UTC

Watch Athens more than Standard & Poor’s. The biggest source of immediate trouble for the euro zone could be the one country the ratings agency didn’t examine in a review that led to the downgrade of France and eight other states. Even if the short-term shoals can be navigated, the rest of the zone won’t find it easy to get by Greece.

The points S&P made when stripping France and Austria of their triple-A ratings and knocking two notches off the ratings of the likes of Italy and Spain were valid. It is true, for example, that policymakers can’t agree what to do to solve the euro crisis and that “fiscal austerity alone risks becoming self-defeating.” But these points, as well as the prospect of S&P downgrades, were already in the market.

Meanwhile, what Mario Draghi said last week about “tentative signs of stabilization” is true. The European Central Bank (ECB), over which Draghi presides, is itself partly responsible for that stabilization by virtue of providing 489 billion euros of three-year money to banks just before Christmas. Mario Monti’s promising beginning as Italy’s prime minister is the other main factor. The Super Mario Brothers have got off to a good start.

Enough austerity, it’s time for reform

Hugo Dixon
Jan 9, 2012 02:47 UTC

Semantics could help save the euro zone. There is a crying need to distinguish between fiscal austerity and structural reform.  The endless austerity programs adopted by the GIIPS — Greece, Ireland, Italy, Portugal and Spain — threaten to crush their economies so much that they are socially unbearable. By contrast, reforming pensions, labor markets and the like would be good for long-term growth. A policy mix that emphasizes the latter and draws some sort of line under the former is needed to stop the euro crisis spinning out of control.

Europeans have become grimly familiar with austerity spirals over the past two years. A government that needs to cut its fiscal deficit embarks on a program of tax hikes and spending cuts. The snag is that this fiscal squeeze, in turn, squeezes the economy — partly via the direct impact of cash being sucked out of the private sector and partly because the private sector loses confidence. The depressed economy means the government’s tax take doesn’t rise nearly as much as envisaged. So the deficit doesn’t decline much and, as a percentage of shrunken GDP, it falls even less. The governments’ creditors, led by Germany, then demand another round of austerity to get the program back on track. With each round, the howls of pain from the population increase, belief that there is light at the end of the tunnel declines and the government’s political capital shrinks.

The Greeks, Irish and Portuguese have been trying to run up this down escalator the longest. Italy and Spain are now embarking on the same regime. Yet more doses will be required over the coming year if the policy mix is unchanged. After all, last year’s budget deficits are expected to be about 10 percent for Greece and Ireland, 7-8 percent for Spain and Portugal (if a one-off pension transfer is ignored) and 4 percent for Italy.

A breakthrough year for nonviolence

Hugo Dixon
Dec 19, 2011 04:38 UTC

The views expressed are his own.

The most electrifying event of the year, for me, was the Egyptian revolution. I’d long had an interest in Gandhian-style struggles. Here was a nonviolent struggle unfolding in real-time against Hosni Mubarak’s repressive regime. Tens of millions of people were gaining their freedom.

The media coverage of the events in Tahrir Square focused on the Facebook revolution. But when I went to Cairo shortly after, I discovered that the use of social media was only part of the reason why the dictator had been toppled. Behind the protests was a cadre of activists who had been trained in the techniques of nonviolent struggle. This realization was a eureka moment. If it was possible to overthrow dictators with comparatively little bloodshed – less than a thousand died in Egypt’s revolution — many millions more elsewhere might be able to gain their freedom given proper planning and training.

2011 was a banner year for nonviolent struggle. Not only did it witness the successful Arab Spring revolutions against dictators in Egypt, Tunisia and Yemen; it also saw three Arab kings – in Morocco, Jordan and Kuwait — liberalize their political systems to head off similar protests. And the brave people of Syria went out on the streets again and again, despite being arrested, tortured and killed in their thousands.

Hara-kiri, British style

Hugo Dixon
Dec 12, 2011 04:21 UTC

The opinions expressed are his own.

The UK’s self-immolation beggars belief. The government’s clumsy attempt to extract concessions from euro zone countries in their time of need has set off a chain reaction which could undermine Britain’s interests and even drive it out of the European Union.

It’s not clear what David Cameron thought he was doing at the European summit in the early hours of Dec. 9 when he demanded vetoes on financial regulation in the EU. Was the prime minister asking for something he knew was unacceptable so that he could return to Britain and parade as a hero in front of the euroskeptics in his Conservative Party? Or did he just vastly overestimate his negotiating position, thinking that the euro zone countries were so desperate to save their single currency that he could bounce them into accepting the British demands by presenting them with a take-it-or-leave-it offer in the middle of the night? If it was the former, Cameron was cynically putting his personal interests above those of the nation; if the latter, he was just extraordinarily inept.

Cameron did little to win allies for his position, not even circulating his list of proposals in advance of the summit, according to Reuters. Even worse, he put Britain in the position of seemingly being prepared to blow up the single currency if he didn’t get his way. In fact, Cameron didn’t have the power to stop the 17 euro zone countries from agreeing to sign a new treaty committing themselves to fiscal discipline. They just sidestepped the existing EU treaty. What’s more, they got all nine of the other countries which are part of the EU but not the single currency to sign up too. So all Cameron achieved in the middle of the night was to irritate Britain’s partners massively and isolate the UK 26-1.

Euro Disziplin may store up trouble

Hugo Dixon
Dec 5, 2011 04:11 UTC

The euro zone will probably get another short-term fix at its summit this week. Exactly how the fix will work isn’t clear. But both Germany and the European Central Bank have softened their positions so much that some sort of solution is in the works. The ECB will probably cut interest rates and spray more liquidity at the troubled banking system; it may also step up its purchases of government bonds; and some scheme for assembling enough money to bail out Italy and Spain — probably by getting national central banks to lend money to the International Monetary Fund, which could then pass it on to Rome and Madrid – may be unveiled.

All this would be cause for celebration. The problem is the price that Germany and seemingly the ECB are demanding for their help: fiscal discipline, embedded in a treaty. Merkel wants the European Commission in Brussels to have the power to overturn irresponsible national budgets and for the European Court of Justice to fine governments that step out of line.

This idea for a treaty is stirring up all sorts of problems. One is that Britain, which is not part of the euro zone but is a member of the European Union, wants a quid pro quo for signing a revised treaty – probably in the form of returning powers over social and judicial affairs to London or getting some veto over the regulation of financial services, the UK’s largest industry.

Don’t leave Plan B too late

Hugo Dixon
Nov 28, 2011 10:00 UTC

It is fashionable for pundits outside Germany to lambast its government, the Bundesbank and the European Central Bank for being inflexible or stupid or both. Can’t they see that all that’s needed is for the ECB to fire its bazooka by printing unlimited money, and the euro crisis would be over?

After spending a couple of days in Frankfurt and Berlin last week, my impression is that these three institutions are neither stupid nor totally inflexible. That said, Germany is still determined to try its current plan for solving the euro crisis, though it has little chance of working. And by the time the trio get round to implementing a Plan B, the euro zone could be in deep recession or even have exploded.

The current plan has three elements. First, the governments of troubled countries such as Italy and Spain need to implement structural reforms and austerity. Second, the zone’s fire extinguisher, the European Financial Stability Facility, needs to be got in good working order in case the fires in Rome and Madrid become uncontrollable. Finally, governments need to agree a treaty committing them to long-term budgetary discipline.

The euro zone’s self-fulfilling spiral

Hugo Dixon
Nov 20, 2011 20:41 UTC

When confidence in a regime’s permanence is shaken, it can collapse rapidly. The fear or hope of change alters people’s behavior in ways which make that change more likely. This applies to both political regimes such as Hosni Mubarak’s Egypt and economic regimes such as the euro.

Fear that the single currency may break up now risks becoming a self-fulfilling prophecy. Banks and investors are beginning to act as if the single currency might fall apart. Politicians and the European Central Bank need to restore belief that the single currency is here to stay. Otherwise, it could unravel pretty fast.

Until a few weeks ago, the idea that the euro wouldn’t survive the current debt crisis was a fringe view. Since the euro summit on Oct. 26-27, it has become a mainstream scenario. So much so that last week risk premiums on the bonds of even triple-A rated countries such as France and Austria rose to record levels, while Spain became the latest country to be sucked into the danger zone.

Italy’s super Mario brothers

Hugo Dixon
Nov 14, 2011 00:50 UTC


The Super Mario Brothers need to work together to save Italy and the euro.

Even if Mario Monti can form a strong government in Italy, the euro zone is vulnerable to bank runs and a deflationary spiral. Stopping that is the role of Mario Draghi, the European Central Bank’s boss. The zone needs vigorous supply-side reform but looser monetary policy. With Silvo Berlusconi gone, the duo and Germany’s Angela Merkel should try to forge a new grand bargain based on this.

Last week witnessed both the Italians and the Greeks dragged to the brink, look into the abyss and dislike what they saw. The two countries have or are in the process of forming national unity governments led by technocrats. This is a step in the right direction. But dangers abound.

The biggest risk is of a visible bank run. There has already been massive deposit flight in Greece as savers fear that the country could get kicked out of the euro – a scenario which is still real despite Lucas Papademos’ appointment as prime minister. But so far there have been no queues outside branches as there were with the UK’s Northern Rock in 2007. If that were to happen, television pictures would be relayed across Europe in seconds potentially provoking copycat runs.

Chaotic catharsis

Hugo Dixon
Nov 7, 2011 02:31 UTC

Chaos, drama and crisis are all Greek words. So is catharsis. Europe is perched between chaos and catharsis, as the political dramas in Athens and Rome reach crisis point. One path leads to destruction; the other rebirth. Though there are signs of hope, a few more missteps will lead down into the chasm.

The dramas in the two cradles of European civilization are similar and, in bizarre ways, linked. Last week’s decision by George Papandreou to call a referendum on whether the Greeks were in favor of the country’s latest bailout program set off a chain reaction that is bringing down not only his government but probably that of Silvio Berlusconi too.

The mad referendum plan, which has now been rescinded, shocked Germany’s Angela Merkel and France’s Nicolas Sarkozy so much that they threatened to cut off funding to Greece unless it got its act together — a move that would drive it out of the euro. But this is probably an empty threat, at least in the short term, because of the way that Athens is roped to Rome. If Greece is pushed over the edge, Italy could be dragged over too and then the whole single currency would collapse. So, ironically, Athens is being saved from the immediate consequences of its delinquency by the fear of a much bigger disaster across the Ionian Sea.