Opinion

Hugo Dixon

UK faces five years of limbo-land

Hugo Dixon
Jan 23, 2013 11:33 UTC

The UK faces half a decade of limbo-land. David Cameron’s promise of an in/out referendum on Britain’s membership of the European Union by the end-2017— provided he wins the next election – means an extremely long period of uncertainty for business. That will be bad for investment. It also heightens the risk of an eventual “Brexit” – a British exit from Europe – which would be even worse for the economy.

An in/out referendum is neither desirable nor necessary. Of course, if the UK was planning to hand further powers to Brussels, it would be a good idea to get the people’s consent. But no leading British politician of either left or right is contemplating such a transfer of sovereignty. Cameron has been driven to promise such a referendum because of the pressure from eurosceptics within his Conservative party as well as fears that UKIP, a fringe political entity which wants Britain to leave the EU, could take votes away from the Tories in the 2015 election.

If Cameron had been promising a quick referendum, the uncertainty for business would be manageable. But he has decided that he first wants to see if he can negotiate a “new settlement” based on a competitive, flexible and fair single market. That’s why the referendum could be nearly five years away.

Cameron may come to regret this long period of limbo-land. Businesses from Britain and overseas will be reluctant to invest so long as there is uncertainty over the UK’s membership of the EU which accounts for half its trade. Less investment could, in turn, make it harder for the economy to pull out of what could be a triple-dip recession. There’s even a tail risk that financial markets might now look at Britain’s still-high deficit more critically and push up gilt yields.

The long-term risk of a “Brexit” has also gone up. Cameron says he would campaign with heart and soul to stay in the EU if he can renegotiate Britain’s relationship in the way that he wants. But he may not succeed in such a negotiation. And, even if he does, the British people may still vote to pull out of the EU – especially since the referendum would be held in the middle of the next parliament, a time when incumbent governments are typically unpopular.

Hugo Dixon: When is it OK to avoid tax?

Hugo Dixon
Jan 21, 2013 10:23 UTC

When is it OK to avoid tax? And when should taxpayers refrain from actions that will cut their bills, even if their actions are perfectly legal? 

As the European economy remains sluggish, the public mood has turned against those who seem to be paying less than their fair share of tax. Last week, for example, saw Goldman Sachs abandon an idea to switch UK bonus dates to cut its employees’ tax bills and an escalation in the row about Greek tax cheating. 

The cases are, of course, very different. In Greece, tax evasion – which is against the law – is rife. The International Monetary Fund’s latest review on the country, published on Friday, says that the “losses to the state from tax evasion are enormous”. It estimates the black economy is 25 percent of GDP.

EU positive contagion hinges on growth

Hugo Dixon
Jan 14, 2013 09:50 UTC

Mario Draghi didn’t quite coin a new phrase last week. But the European Central Bank president certainly popularised the expression “positive contagion”. After years in which the euro zone has been suffering from plain old contagion – which doesn’t even need the qualifier “negative” – Draghi now thinks a positive dynamic is in play. 

The term “contagion” has tended to be used in financial markets to refer to the way that problems in one country (such as Greece) can so unnerve investors that they cause difficulties in other countries (for example, Portugal, Spain and Italy). Draghi, though, seems to be using the word more broadly to cover the whole panoply of vicious cycles that had been sucking the euro zone into a whirlpool. 

The ECB president is right that the vicious cycle in financial markets has given way to a virtuous one. The best measure of this is how peripheral bond yields have dropped since he said last July that the ECB would do whatever it took to preserve the euro – “and believe me, it will be enough”. Spanish 10-year yields have fallen from 7.4 percent to 4.9 percent, while Italian ones are down from 6.4 percent to 4.1 percent. The Stoxx 50 equity index, meanwhile, is up 12 percent. 

The EU speech Cameron should make

Hugo Dixon
Jan 7, 2013 10:05 UTC

David Cameron is planning a keynote speech on Britain’s relationship with the EU later this month. Here is what the UK prime minister should say.
 
 The euro crisis is forcing euro zone nations to rethink how they wish to run their currency union. It is also forcing European Union countries that don’t use the single currency, such as Britain, to rethink their relationship with Europe.

We have three main options: quit the EU; move to the edge as the euro zone pushes towards closer union; and seek to stay at the heart of Europe and influence its development in a way that promotes our interests.

There are members of my own Conservative party who would like Britain to quit. There are others who would like us to move to the periphery. But I am determined to make sure that we stay at the centre.

It’s 20.12.2012; and it’s the end of a magical era

Hugo Dixon
Dec 20, 2012 01:48 UTC

One doesn’t have to be a Mayan to believe that tomorrow represents a numerological end of an era. Apocalyptic visions stem from reading the Mesoamerican Long Count Calendar. But even using the widely used Gregorian Calendar, there’s something special about today: 20.12.2012.

It’s one of those dates where digits create interesting patterns. It also comes at the end of 13 years which have been astonishingly fertile for such numerologically “magic” dates. The rest of the century is going to be a desert by comparison.

Dates can be aesthetically attractive because they repeat a number several times (eg last week’s 12.12.12) or contain a string of successive numbers (eg last month’s 10.11.12) or because they are palindromes (eg 01.1.10), where you get the same date if you run the numbers backwards.

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.

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.