Opinion

Hugo Dixon

Why Mario Draghi scores AAA on PPP

Hugo Dixon
Dec 17, 2012 10:07 UTC

Who is Europe’s most powerful man? If one phrased the question as who is Europe’s most powerful person, the answer might well be Angela Merkel. But the deliberate use of the masculine excludes Germany’s chancellor, leaving the field open to Mario Draghi.

This answer can, of course, be disputed. How can one compare power in economics with power in, say, religion? Is it possible to rank the technocratic European Central Bank boss on the same scale, for example, as the Pope?

The best place to start is with an attempt to understand what power is. Bertrand Russell, the British philosopher, said it was the production of intended effects. By contrast, Steven Lukes, one of the top contemporary power theorists, said in an interview last week that power is the capacity to make a difference in a manner that is significant.

What’s appealing about the way that Lukes, a professor of sociology at New York University, puts things is his use of the word “significant”. Whereas Russell just looks at whether people can get their way, the introduction of significance allows us as observers to take a view about whether powerful people are affecting things in a manner that matters to us.

That, in turn, allows us to rank individuals’ power. We can decide that, in Europe at the current conjuncture, what matters most is navigating the current euro crisis and pick our ranking with that in mind. That, indeed, is my view – which, of course, is somewhat subjective.

Dos and Don’ts of EU banking union

Hugo Dixon
Dec 10, 2012 10:44 UTC

Conventional wisdom has it that the euro zone needs a banking union to solve its crisis. This is wrong. Not only are there alternatives to an integrated regulatory structure for the zone’s 6,000 banks; centralisation will undermine national sovereignty.

“Create a banking union” became a rallying cry earlier in the year when it looked like the euro was going to explode. Advocates of a single banking authority said it would break the “doom loop” which tied troubled banks to troubled governments. European Union governments will this week continue their attempt to agree on a single supervisor, the first stage of a banking union.

There are two parts to the doom loop: when banks go bust, their governments bail them out, adding to their own debts; and when governments become over-indebted, the nation’s banks are usually big lenders, so the banks get sucked into the sovereign debt vortex.

Bersani may not be bad for Italy

Hugo Dixon
Dec 3, 2012 10:22 UTC

The last Italian prime minister whose surname began with a “B” – Silvio Berlusconi – was a disaster. The country’s next leader’s name is also likely to start with a “B”.

Investors want Mario Monti, the technocrat who took over from Berlusconi last year, to stay as prime minister after the election, which will probably be in March. But they are more likely to get Pier Luigi Bersani, leader of the left-wing Democratic Party (PD). While there are risks, such an outcome may not be as bad as it looks – not least because Bersani has promised to continue with Monti’s policies and was one of the few reformers when Romano Prodi was prime minister in the last decade.

Trade union-backed Bersani will be the standard-bearer for the left in the coming elections after winning a decisive primary at the weekend against Matteo Renzi, the modernising mayor of Florence. His first comments were promising: he said the PD would have to tell Italians the “truth, not fairy-tales” about the country’s grave economic situation.

Battle against Grexit far from won

Hugo Dixon
Nov 26, 2012 10:15 UTC

The battle against Grexit – Greece’s exit from the euro – is far from won. Assume Athens is promised its next 44 billion euro tranche of bailout cash and some further debt relief when euro zone finance ministers reconvene on Nov. 26. Even then, the banks will still be hobbled, while another round of austerity is in the works and vested interests are rife.

It will be hard to restore confidence and, without that, there won’t be a return to growth. Meanwhile, without growth, Antonis Samaras’ fragile coalition government will fall. Alexis Tsipras’ radical left SYRIZA movement would then probably take over – plunging the country into a new hot phase of the crisis. What’s more, if investors and consumers fear such a scenario, they won’t start spending – making a continuation of the slump self-fulfilling.

Samaras, who became as prime minister in June, has been better than many feared. His strategy has been to do everything demanded of Greece by the “Troika” – the European Commission, the European Central Bank and the International Monetary Fund – with the aim of changing the perception that Athens cannot be trusted.

Is Hollande more like Rajoy or Monti?

Hugo Dixon
Nov 19, 2012 10:41 UTC

Is Francois Hollande more like Mariano Rajoy or Mario Monti? In other words, is the French socialist president condemned to be always behind the curve with reform like Spain’s conservative prime minister? Or can he get ahead of it like Italy’s technocratic premier?

I put this question to my fellow guests at a dinner in Paris last week. France is not in imminent risk of blowing up, as wrongly implied by the Economist magazine, which used a cover picture of a lighted fuse on baguettes tied together like sticks of dynamite. France is much richer than Spain and its people are more willing to pay their taxes than the Italians. French 10-year borrowing cost is only 2.1 percent, compared to Italy’s 4.9 percent and Spain’s 5.9 percent.

That said, the country has three deep-seated problems which could ultimately cause a mega-crisis: public spending at 56 percent of GDP is way too high; industrial competitiveness has steadily eroded; and the population is in a state of denial. The last cannot be said of either Italians or Spaniards.

Brexit could come before Grexit

Hugo Dixon
Nov 12, 2012 10:12 UTC

Investors have been obsessed with the notion of “Grexit” – Greece’s exit from the euro. But “Brexit” – Britain’s exit from the European Union – is as likely if not more so. The country has never been at ease with its EU membership. It refused to join its predecessor, the European Economic Community, in 1957; it was then blocked twice from becoming a member by France’s Charles De Gaulle in 1960s; and shortly after it finally entered in 1973, it had a referendum on whether to stay.

The euro crisis has put further pressure on this difficult relationship. David Cameron’s Conservative Party, the governing coalition’s dominant group, delights in pointing out the flaws in the single currency. The party’s eurosceptics feel vindicated because they have long believed that monetary union was only possible with political union.

But “I told you so” is never a good way of endearing oneself to others. What’s more, the idea that greater integration in the euro zone has “remorseless logic” – as Britain’s finance minister, George Osborne, puts it – directly undercuts the country’s national interest. The more the 17 countries in the single currency club together, the more the UK will be left out on the fringe.

UBS exposes myth of full-service bank

Hugo Dixon
Nov 5, 2012 10:23 UTC

During the long upswing, second-tier and even third-tier banks felt they needed to offer every product in every part of the world. That led to inflated costs, unethical practices and now terrible returns. Last week’s bold move by UBS to hack back its fixed income division, with the loss of 10,000 jobs, exposes the myth of the so-called “full-service” firm.

The drive behind creating full-service firms was the idea that corporate and investor clients – say, Vodafone or BlackRock – wanted to get all their financial services from a single source. A further motivation was fear among commercial banks that they would be disintermediated by the capital markets. Corporate clients would finance themselves by issuing bonds to investors rather than borrowing from banks.

The full-service myth probably dates from at least the time of “Big Bang” in 1986, when London’s financial markets were deregulated. Over the past quarter of a century, the financial industry has been bulking up in investment banking either by acquiring rivals or by engaging in hiring sprees. UBS, for example, merged with Swiss Bank Corporation, which had already bought S.G. Warburg, and then acquired PaineWebber. It also made a disastrous push into fixed income trading, which cost its shareholders tens of billions of dollars.

World needs healthy capitalism

Hugo Dixon
Oct 29, 2012 09:25 UTC

Last week I gave a speech on “healthy capitalism” at Oxford University. Before doing so, I tried the idea out on an academic friend of mine. He scoffed at it. For him, “healthy capitalism” was an oxymoron. Five years after the start of the world’s worst financial crisis in decades, it is easy to mock capitalism. The system ran amok – leading to debt, unemployment and shrinking economies.

But that’s precisely why the world needs healthy capitalism. Health involves vigour, well-being and resilience. Capitalism – with its basis in free enterprise and private property – can have all those qualities provided warped incentives are corrected and the culture of greed is tempered. State socialism certainly cannot. The practical alternative is to reform capitalism not throw it away.

But how should it be reformed? After the tribulations of recent years, the conventional wisdom is that the problem has been too much freedom. That, though, is a misdiagnosis. Most of the diseases that have become apparent during the crisis have been caused by a distortion of free enterprise rather than too much freedom.

Euro zone doesn’t need Disziplin union

Hugo Dixon
Oct 22, 2012 08:59 UTC

European leaders nudged forward plans for a fiscal union with discipline as its leitmotif at last week’s summit. But such a “Disziplin union” is neither desirable nor necessary. It may not even be politically feasible.

The consensus among the euro zone political elite is that fiscal union is needed to complete the crisis-ridden monetary union. There are two rival views of what this should consist of: a panoply of rules to prevent and punish irresponsible behaviour; or financial payments to help weaker economies. The former view, espoused by Germany, is in the ascendant. It involves lots of sticks but not many carrots.

The summiteers’ main achievement was to give further impetus to the idea that the European Central Bank should act as the zone’s central banking supervisor from the start of next year after Berlin dropped its insistence that its own savings banks should be excluded from the regime. That was an important political concession. It’s also conceivable that the new supervisor will be better able to clean the cesspits in parts of the euro zone than the current often-conflicted national supervisors.

Spanish circle getting hard to square

Hugo Dixon
Oct 15, 2012 09:20 UTC

The art of politics is about squaring circles. In the euro crisis, this means pushing ahead with painful but necessary reforms while hanging onto power.

In Spain, where I spent part of last week, these circles are getting harder to square. Mariano Rajoy isn’t at any immediate risk of losing power. His 10-month old government has also taken important steps to reform the economy – cleaning up banks, liberalising the labour market and reining in government spending.

But the recession is deepening, the prime minister is a poor communicator and his political capital has plummeted. Madrid will also find it harder than thought to access help from its euro zone partners.