Opinion

Hugo Dixon

How the euro zone can muddle through

Hugo Dixon
Jul 8, 2013 09:27 UTC

Three years on, debate still rages over what is to blame for the euro crisis and what to do about it. Meanwhile, large parts of the zone are in a deep recession and the talents of a generation of young people are being wasted.

In looking at what went wrong, some point to the profligacy of borrowers while others stress the design flaws in the system. Yet others pin the blame on how the crisis has been managed. There are still others who think that the euro zone is a victim of a credit crunch that began in the United States.

There is some truth in all these explanations. While the credit crunch did trigger the crisis, it exposed a host of problems that had been masked by a decade of easy growth. Peripheral countries had grown uncompetitive as a result of rising wages. Often there was corruption and excessive debt, while anti-competitive practices that suited vested interests kept productivity low. Almost everywhere, governments ran unsustainably generous welfare states.

The crisis has also been managed appallingly. The zone took two years to let Greece restructure its debts. In the meantime, the French, German and other banks which had financed Athens’ profligacy were able to get much of their money out of the country. If the banks had been hit early, their governments would have had to bail them out. The discussion would then have been as much about foolish lenders as about lazy borrowers.

Among the other mistakes was the failure to clean up the zone’s zombie banks and the fact that both fiscal and monetary policy were too tight. But troubled countries have also taken too long to root out vested interests and restore competitiveness.

Financial reform must carry on

Hugo Dixon
Jul 1, 2013 08:20 UTC

After six years of crisis, much progress has been made in fixing the financial system. There was, for example, a landmark European Union deal last week to make creditors rather than taxpayers foot the bill for bust banks. But there’s a huge job still to do.

In the years running up to the crisis, the financial system ran amok on both sides of the Atlantic. Among the long litany of problems was a clutch of distorted incentives, which encouraged banks to take excessive risks by rewarding success but not punishing failure. These heads-I-win-tails-you-lose incentives skewed the behaviour of individuals, banks and the entire system.

A crackdown on bankers’ pay is starting to deal with individual risk-taking. Compensation can be clawed back from financiers whose bets ultimately turn sour. There are also plans, mainly in Europe, to pay a chunk of bankers’ compensation in “bail-in bonds” – which will get wiped out or turned into lowly valued shares if a bank fails. That should get bankers to pay more attention to risk.

Italy’s Letta makes best of bad job

Hugo Dixon
Jun 24, 2013 08:26 UTC

Italy’s new prime minister, Enrico Letta, is making the best of a bad job. After February’s inconclusive election, it looked like Italy’s dysfunctional political system might drag the country further into the abyss. There was a risk that nobody would be able to form a government, new elections would be called and that even these would end in a stalemate.

In the end, a grand coalition was formed involving Letta’s centre-left Democrats, Silvio Berlusconi’s centre-right PDL and Mario Monti’s centrist group. Putting together such a coalition was itself an achievement – given that the Democrats and Berlusconi hate one another and that the Five Star Movement, led by comedian Beppe Grillo, refused to make deals with anybody.

Even after the coalition was formed – largely as a result of pressure from Giorgio Napolitano, Italy’s respected octogenarian president – there wasn’t much hope that it could achieve anything. But Letta has been quietly getting on with reform, as I discovered when I spent a few days in Italy last week. Part of the explanation is that he is an intelligent, modest, consensus-builder rather than a charismatic figure with a big ego.

Turkey’s economy is vulnerable

Hugo Dixon
Jun 17, 2013 10:06 UTC

Tayyip Erdogan seems to like the concept of “choking” things. At the weekend, Turkey’s prime minister sent riot police into an Istanbul park with tear gas and water cannons to clear out the protestors. A week earlier, he had threatened to “choke” an alleged “high-interest-rate lobby” of speculators who wanted to push interest rates up and suffocate the economy.

Erdogan’s harsh actions against protestors and harsh words against investors could backfire economically. The country depends on foreign investors to fund its big current account deficit. If they turn tail in response to the mounting unrest, interest rates will indeed have to rise.

The protests which began two weeks ago over Tayyip Erdogan’s alleged authoritarianism, triggered by the prime minister’s insistence on bulldozing one of Istanbul’s few public parks, initially alarmed investors. The stock market plunged, the lira fell and government bond yields spiked. Then, after the central bank intervened in the foreign exchange market and Erdogan offered concessions last week, investors calmed down.

Euro zone mustn’t flunk bank cleanup

Hugo Dixon
Jun 10, 2013 08:31 UTC

One reason the euro zone is in such a mess is that it hasn’t had the courage to clean up its banks. The United States gave its lenders a proper scrubbing, followed by recapitalisation, in 2009. By contrast, the euro zone engaged in a series of half-hearted stress tests that missed many of the biggest banking problems such as those in Ireland, Spain and Cyprus.

In recent years, the zone has started to address these problems on a piecemeal basis. But it is still haunted by zombie banks, which are not strong enough to support an economic recovery.

The European Central Bank now has a golden opportunity to press the reset button in advance of taking on the job of supervisor in mid-2014. It mustn’t flunk the cleanup.

Arming Syrian rebels fraught with risk

Hugo Dixon
Jun 3, 2013 09:04 UTC

The UK, France and maybe America are edging towards a policy of arming Syria’s “moderate” rebels if planned peace talks with the Assad regime don’t produce a breakthrough. The idea would be to tilt the civil war in favour of moderates and against both Assad’s Iranian-backed regime and al Qaeda-style jihadists. But the scheme, while superficially attractive, is fraught with risk.

The West’s three nuclear powers clearly don’t have much appetite for intervention in Syria. Nobody is pushing for an Iraqi or Afghan-style invasion. There is also precious little desire to impose a Libyan-style no-fly zone – not least because it would be impossible to get United Nations’ authority for such a policy given Russia’s steadfast support for the Assad regime.

The West is anyway struggling to clarify why it should get involved in this increasingly grisly sectarian war. Syria doesn’t have much oil or gas, unlike Libya and Iraq. Nor is Assad threatening the West with al Qaeda-style attacks. It could even be argued, on the basis of realpolitik, that it could be in the West’s interests if Sunni jihadists and the Iran-Assad-Hezbollah Shi’ite axis exhausted each other in an orgy of mutual destruction.

Why Draghi likes London

Hugo Dixon
May 27, 2013 09:26 UTC

When Mario Draghi was appointed President of the European Central Bank, the German tabloid Bild gave him a Prussian helmet because it admired his Teutonic anti-inflation credentials. The Sun, Bild’s British equivalent, should give him keys to the City of London because of his pro-market credentials.

Draghi likes London. The Italian still has a flat in the city, kept from his time as a Goldman Sachs banker. He is a man with a natural affinity for the markets.

Last week Draghi was in London, the scene of his July 2012 promise to “do whatever it takes to preserve the euro”. The ECB President’s message this time was that Europe needs a more European UK as much as the United Kingdom needs a more British Europe.

UK should get on front foot with City

Hugo Dixon
May 20, 2013 08:30 UTC

It is perhaps too much to expect Britain’s Conservative-led government to lead any initiatives on Europe, such is the orgy of self-destruction in the party over whether the UK should stay in the European Union. But, insofar as David Cameron manages to get some respite from the madness, he should launch a strategy to enhance the City of London as Europe’s financial centre.

Britain has in recent years been playing a defensive game in response to the barrage of misguided financial rules from Brussels. It now needs to get on the front foot and sell the City as part of the solution to Europe’s problems. The opportunity is huge both for Britain and the rest of Europe.

The chance of getting the EU to swing behind a pro-City strategy may, on the face of it, seem pie in the sky. Many people blame financiers for the financial crisis. So how could they be part of the solution? What’s more, Continental Europeans have long tended to be suspicious of financial markets.

Brexit would be bad for Britain

Hugo Dixon
May 13, 2013 09:25 UTC

Quitting the European Union would be bad for Britain. Membership of even an unreformed EU is better than “Brexit”. Quitting would mean either not having access to the single market – at a huge cost to the economy – or second-tier membership.

The debate over Brexit has moved into high gear in the past 10 days, after the UK Independence Party – which wants Britain to pull out of the EU – performed well in English local elections. The Conservative party, which rules in coalition with the pro-European Liberal Democrats, has been thrown into turmoil because UKIP has been winning votes largely from the Tories.

What’s more, many Conservatives would like Britain to quit the EU too. Last week Nigel Lawson, one of Margaret Thatcher’s finance ministers, argued the case for Brexit. Boris Johnson, the mayor of London who is the Conservatives’ most popular politician, also shuffled a little further in a eurosceptic direction – although he stopped short of calling for an exit.

Hugo Dixon: How to respond to UKIP’s surge

Hugo Dixon
May 6, 2013 02:33 UTC

By Hugo Dixon

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

The UK Independence Party will not come close to winning Britain’s next general election. The populist anti-Europe, anti-immigration party may not even win a single seat, despite last week’s surge in English local elections where it won nearly a quarter of the vote – running a close third to Labour and the Conservatives. That’s how the maths of Britain’s first-past-the-post voting system works.

Nevertheless, the rise of UKIP could have profound consequences for British politics and business – in particular, for the UK’s relationship with the European Union. This is because UKIP is mainly taking votes away from David Cameron’s Conservatives. A calculation by Sky News suggested that, if the local election results were translated into a general election, Labour would win an overall majority. Even though UKIP might win no seats itself, its popularity would damage Cameron’s prospects for reelection in 2015.