Opinion

Hugo Dixon

Brexit process would be messy

Hugo Dixon
Oct 21, 2013 08:58 UTC

Imagine the British people vote to quit the European Union in the referendum David Cameron has promised to hold by 2017. What happens next? What, if any, special relationship would the UK seek to retain with the EU? Would it be able to negotiate what it wanted? And how would the economic damage unleashed by years of uncertainty be kept to the minimum?

These questions aren’t just troubling British businesses, the vast majority of which want to stay in the EU so they can enjoy full access to its single market. They are also worrying some eurosceptics who are concerned that, even if it would be good for Britain to quit the EU, the process of getting from A to B could be messy.

Hence, the launch of a 100,000 euros prize by the Institute for Economic Affairs, a UK eurosceptic think-tank. It will announce later this month the shortlist for the best essay to answer the question of what measures are needed to ensure a free and prosperous economy after an “out” vote in a putative referendum.

But don’t get your hopes up. The last time British eurosceptics launched a high-profile essay prize, the Wolfson Prize, it was to work out the best way for a country such as Greece to quit the euro. The winner, Roger Bootle, who is incidentally one of the judges of the IEA prize, came up with a not terribly realistic scheme based on maintaining secrecy until the last minute.

The main reason to worry that leaving the EU could be messy is because it won’t be clear after an “out” vote what relationship the British people will want to keep with their former partners. In particular, it won’t be obvious whether the electorate wants to stay in the EU’s single market or to leave that as well as the European political framework.

Bundesbank right to focus on doom loop

Hugo Dixon
Oct 7, 2013 08:48 UTC

Germany’s Bundesbank is not afraid of playing the role of bad fairy. Last year it opposed the European Central Bank’s scheme for buying potentially unlimited quantities of sovereign bonds – a promise which ended the hot phase of the euro crisis. Last week, it criticised rules that encourage euro zone banks to load up on their own governments’ debts.

Jens Weidmann, the Bundesbank president, is right to put this topic on the agenda. After all, the exposure of banks to governments is one half of what has been dubbed the “sovereign-bank doom loop.” When governments such as Greece got into trouble, they dragged their banks down as well. (The other half of the doom loop involves troubled banks dragging down their governments.)

The problem is how to break this loop without triggering a new crisis in vulnerable countries such as Italy and Spain. After all, if their banks were suddenly told to cut their holdings of Italian and Spanish bonds, Rome and Madrid would be hard-pressed to fund themselves.

Euro zone needs anti-boom activism

Hugo Dixon
Sep 23, 2013 09:11 UTC

A big problem with the euro zone’s one-size-fits-all monetary policy is that it risks fitting nobody. That, indeed, was a key cause of the crisis. Early in the century, countries such as Spain and Ireland were booming, while Germany was in the doldrums. Setting interest rates at a level that worked well for the euro zone on average had the effect of inflating the Spanish and Irish property bubbles while pushing up wages so their economies became uncompetitive. When the bubbles burst, the damage was devastating.

It would be hard to argue that any part of the euro zone is currently booming. Even Germany will eke out GDP growth of only 0.3 percent this year, according to the International Monetary Fund. But it may not be long before the problems of a one-size-fits-all monetary policy are back to haunt the zone. Even though the German economy isn’t growing strongly, it is still outperforming the average. What’s more, labour is in short supply in Germany and house prices are rising at a moderate clip – a big contrast to the average, let alone recession-inflicted countries such as Italy.

The European Central Bank’s policy of keeping interest rates at the current 0.5 percent level or lower for an “extended period” is right for the euro zone on average. The weaker countries would benefit from even looser monetary policy. Germany, though, may already need something tighter. If the “extended period” of low interest rates goes on for years, it could experience a boom.

Still too big to fail

Hugo Dixon
Sep 16, 2013 09:29 UTC

Lehman Brothers’ bankruptcy five years ago crushed the global economy, turfed millions of people out of their jobs and left governments groaning under hefty debt burdens. Since then, policymakers have been beavering away to make sure that a similar calamity never happens again. Measures to address many of the key problems have been taken or are in the works. But if a Lehman went bust today, there would still be havoc.

The main success has been in building up the capital cushions banks have to withstand shocks. Since the end of 2009, the big global banks have increased their shareholder capital by $500 billion – the equivalent of 3 percent of their so-called risk-weighted assets, according to the Financial Stability Board (FSB), the organisation tasked by the G20 countries to fix the financial system. They are also on track to meet tighter global standards nearly five years ahead of the deadline.

But even this success has to be qualified. The amount of capital banks are supposed to hold depends on the riskiness of their loans. But lenders have too much freedom to decide for themselves how risky a loan is, giving them the opportunity to engage in monkey business. Meanwhile, inside the euro zone, the job of building capital buffers has not been properly done because of a tendency to sweep problems under the carpet. Thankfully, regulators are onto both these issues so there’s a reasonable chance they’ll be solved.

EU should refine its welfare policy

Hugo Dixon
Sep 9, 2013 09:16 UTC

The European Union is underpinned by the so-called “four freedoms”: the free movement of goods, services, capital and people. There’s little controversy over the first three. But the free movement of people has become a hot political issue in many countries, often whipped up by nationalist parties. Some people who want to keep immigrants out are racists. There are also two supposed arguments for keeping foreigners out: that they take both “our jobs” and “our benefits”.

Immigration is a particularly live issue in the UK. In the European Commission’s latest Eurobarometer survey, 32 percent of the British people questioned thought it was one of the two most important issues facing the country. The average for the EU as a whole was 10 percent.

In a poll for The Independent last month, two-thirds of those questioned thought British firms should give UK citizens priority over other candidates from elsewhere in Europe when hiring new workers – even if this meant Britain had to leave the EU. Just 16 percent disagreed. The UK Independence Party, which wants Britain to quit the EU, has heightened anxiety by arguing that there will be a wave of immigrants from Romania and Bulgaria after the last restrictions on their citizens’ movements are lifted at the end of this year.

Vodafone deal days back with a twist

Hugo Dixon
Sep 2, 2013 09:17 UTC

Vodafone’s deal-making days are back – with a twist. The UK mobile giant still holds the record for the world’s biggest deal – its $203 billion hostile acquisition of Germany’s Mannesmann in 2000. It is now on the verge of taking the number three slot as well, by selling its minority stake in Verizon Wireless, America’s largest mobile phone company, for $130 billion to Verizon Communications, which owns the rest.

Over its 31-year life, Vodafone has completed an astonishing series of deals. As so often with mergers and acquisitions, it has been a better seller than buyer. The same is likely to be the case with the Verizon deal.

Vodafone began its life when Racal Electronics, a UK defence firm, won a licence to provide cellular communications in Britain in 1982. As mobile communications started to boom, it soon became the jewel in Racal’s crown – so much so that Cable & Wireless, another UK telecoms group, tried to buy Racal in 1988.

Cameron, UK hurt by Syria vote fiasco

Hugo Dixon
Aug 30, 2013 09:26 UTC

Rarely has a UK prime minister done so much damage to himself in a single week as David Cameron has with his mishandling of a vote authorising military action against Syria. Cameron may cling onto power after his stunning parliamentary defeat on Thursday night, but he will cut a diminished figure on the domestic and international stage. In the process, he has also damaged Britain’s influence.

Cameron’s litany of errors began with his decision to recall parliament from its summer holidays in order to give the green light to British participation in a military strike designed to punish Bashar al-Assad’s murderous regime for its alleged use of chemical weapons against its people last week. The decision to get parliament’s approval was right, even if not constitutionally necessary. The mistake was to rush things before all the evidence of Assad’s culpability had been gathered and published. In France, which is also contemplating military action, the parliamentary debate is scheduled for next week.

To be fair, Cameron tried to achieve political consensus. He initially persuaded Ed Miliband, the Labour leader, to back military action. He also got Nick Clegg, the deputy prime minister and leader of the Liberal Democrats, to sign up. Both of these are also partly to blame for the fiasco. They should have attached many more conditions to their support.

West mustn’t rush into Syrian conflict

Hugo Dixon
Aug 27, 2013 09:49 UTC

The drumbeats of a new Western military intervention in the Middle East are beating louder and louder. U.S. Secretary of State John Kerry said on Monday it was “undeniable” that chemical weapons had been used in an attack last week in Damascus. Meanwhile, the British foreign secretary said the UK and its allies could launch a military intervention without the approval of the United Nations. This is because a U.N. resolution authorising an attack on Syria would almost certainly be blocked by Russia.

The desire to do something to punish Bashar al-Assad’s murderous regime is understandable, particularly after last week’s gas attack. But the West still mustn’t rush in. Before it takes any military action, it needs to present compelling evidence that Assad is the culprit. Any intervention should also be a specific response to the gas attack rather than suck the West into this ghastly civil war.

Many people will argue that we already have the evidence we need to know that Assad is guilty. The weapons were used in a part of Damascus where his troops had been vainly trying to dislodge rebels. Assad has a big stash of chemical weapons and the means to deliver them. What’s more, he refused to give U.N. investigators immediate access to the site – seemingly the action of a man who wants to cover up a crime rather than that of an innocent who has been slandered.

EU ripe for single-market push

Hugo Dixon
Jul 29, 2013 09:25 UTC

The European Union is ripe for a big, new single-market push. Deepening the single market would do a lot for the EU’s sagging competitiveness. Vested interests may be opposed. But a drive to open up markets would help the euro zone periphery and could keep Britain in the EU – killing two birds with one stone.

It may seem odd to be calling for more work on the single market. Did the Treaty of Rome not promise the freedom of movement of goods and services throughout what is now the EU all the way back in 1957? Did the EU not complete the single market in 1992? And wasn’t a directive pledging free trade in services passed in 2006?

Well, yes and no. Free trade is not just about lifting intra-EU tariffs which were, indeed, abolished decades ago. It is also about dealing with a mass of national red tape, which protects local industries from competition. Such rules are especially prevalent in services industries.

How to legitimise EU: decentralise

Hugo Dixon
Jul 22, 2013 08:41 UTC

The European Union is facing a crisis of legitimacy. This is evidenced in a decline in support for the EU among citizens in pretty much every member country. The most extreme manifestation is in the UK, where pressure is mounting to quit the EU.

There are two main schools of thought about how to restore trust in Brussels. One is to increase the direct say citizens have over what the European Commission does – say by giving yet more power to the European Parliament or by having a directly elected European Commission president. The other is to stop Brussels interfering in things best left to nation states.

The former school of thought is based on a misconception. The EU does not have a demos: few Europeans feel European rather than Italian, German, French or whatever. Witness the low turnout for European Parliament elections. Trying to construct a democracy without a demos is artificial and so won’t solve the legitimacy problem.