Opinion

Hugo Dixon

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.

David Cameron himself has not shifted his position. He wants to hold a referendum in 2017 after he has had a chance to renegotiate Britain’s relationship with the EU in so far unspecified ways. But he may be tempted to tacitly support legislation to call a plebiscite in an attempt to embarrass the opposition Labour party which has so far refused to back such a vote.

Despite the increasingly anti-European tone of the debate, the overall likelihood of Britain quitting the EU hasn’t really changed since the local elections. True, the probability of the British people voting in favour of staying in the EU in a referendum has fallen. But the chance of such a plebiscite taking place has also probably dropped – because UKIP’s rise makes it less likely that Cameron will be reelected in 2015.

Austerity debate misses half the point

Hugo Dixon
Apr 29, 2013 09:36 UTC

The austerity debate misses half the point. It is true that governments, especially in the euro zone, shouldn’t chase an austerity spiral ever downwards. But they can’t just sit on their hands. They must drive even harder for structural reforms.

The last few weeks have witnessed a sea-change in the debate over fiscal austerity. A seminal academic paper by Carmen Reinhart and Kenneth Rogoff, which purported to show that economic growth was impaired if government debt levels exceeded 90 percent of GDP, has been discredited.

Meanwhile, the European Commission has softened its line on the merits of further deep budget cuts in peripheral economies. Spain, for example, looks like it will get until 2016 to bring its deficit down below the European Union’s magic number of 3 percent of GDP. Portugal, Greece, Italy and France are also being shown greater leniency by Brussels. One of the first things Enrico Letta, Italy’s new prime minister, said last week was that country needed to focus on growth not austerity.

Greece will probably pull through

Hugo Dixon
Apr 22, 2013 08:52 UTC

Greece is not yet out of the woods. But there is a credible path that could lead the country back into the sunlight. That’s the main conclusion of a week I have just spent in the country.

Although the economy will have a terrible 2013, next year should be better. But the outlook is fragile: political crisis could yet rear its ugly head, tax evasion is rife and there’s the risk of external shocks.

Look first at the good news. Antonis Samaras’ coalition government has held together surprisingly well since it came to power last June following a period of political chaos, despite pushing through extremely unpopular measures. Samaras’ centre-right New Democracy party is neck and neck in the opinion polls with the radical left Syriza, the main opposition party. Samaras hasn’t suffered the plunging support of Spain’s Mariano Rajoy or France’s Francois Hollande.

Cyprus is edging towards euro exit

Hugo Dixon
Apr 8, 2013 09:17 UTC

Cyprus is no longer centre stage. Nicosia has agreed a 10 billion euro bailout deal with its euro zone partners and the International Monetary Fund. A visible bank run has been averted by stringent capital controls. International markets, which only ever suffered a mild bout of jitters, have calmed down.

But it would be foolish to forget about Cyprus. The small Mediterranean island is edging towards euro exit. Quitting the single currency would devastate wealth, fuel inflation, lead to default and leave Cyprus friendless in a troubled neighbourhood. Even so, the longer capital controls continue, the louder the voices calling for bringing back the Cyprus pound will grow.

President Nicos Anastasiades is against Cyprus leaving the euro. But the main opposition communist party wants to pull out. A smaller opposition group wants to stay in the euro but kick out the troika – the European Commission, the European Central Bank and the IMF. The country’s influential archbishop is also critical of the troika.

Cyprus bank “resolution” a bad joke

Hugo Dixon
Apr 3, 2013 09:03 UTC

The “resolution” of Cyprus’ banks is a bad joke. Resolution is one of the new buzzwords in financial regulation. The practice is supposed to stop taxpayers having to bail out banks, while imposing pain fairly on shareholders and creditors.

In Cyprus, Greek deposits and favoured groups at home are exempt from haircuts, while other groups of depositor are hammered even harder. It’s anything but fair.

The resolution of Cyprus’ banks doesn’t matter just for those directly affected. It is one of the most ambitious cases of cross-border resolution since the financial crisis began. So a bad result here is hardly a good advertisement for the technique.

Cyprus leaves banking union up in air

Hugo Dixon
Apr 1, 2013 21:08 UTC

The Cypriot catastrophe shows just how far away the euro zone is from creating its much-touted “banking union”. There was no euro zone supervision of Cyprus’ big banks, no transnational approach to put them into controlled bankruptcy, no common deposit insurance and no flow of bank rescue funds from abroad.

Instead, there was weak supervision by the Central Bank of Cyprus and a mad scramble to carve up the banks’ assets on national lines. Nicosia was left to shoulder the whole cost of protecting small depositors and the euro zone said that none of its bailout cash could be injected into the troubled banks.

Optimists hope the fiasco will provide the euro zone with the impetus to complete its banking union. But it is equally possible that core countries such as Germany, Finland and the Netherlands will become even more reluctant to absorb the liabilities of bust peripheral banks.

Cyprus controls an “omnishambles”

Hugo Dixon
Mar 28, 2013 10:40 UTC

Cyprus’ capital controls are an “omnishambles”. If the Argentine-style “corralito” really can be lifted in seven days, the damage could be contained. But that doesn’t seem credible. Extended controls could spawn bribery, sap confidence, further crush the economy, spread contagion and ultimately lead to the country’s exit from the euro.

The lesson of capital controls elsewhere is that, once they are imposed, they are hard to remove. Iceland’s curbs are still in place five years after they started. In Argentina, they lasted a year.

There’s little reason to suppose it will be much different in Nicosia. After all, the restrictions – which limit both the amount of money people can take from their banks and the amount they can transfer abroad – have been imposed because the lenders do not have enough access to ready funds. If there’s not sufficient liquidity today, why should anybody believe there will be enough in a week, a month or even a year?

Cyprus deal best of a very bad job

Hugo Dixon
Mar 25, 2013 10:27 UTC

Cyprus’ economy is going to suffer terribly in the next few years. Some of that is inevitable given how bloated the banking system had become. But the disastrous handling of the crisis, especially in the past week, will make things much worse.

That said, the bailout deal that Cyprus reached with its euro zone partners in the early hours of Monday morning makes the best of an extremely bad job – both for the small Mediterranean island and its rescuers.

It establishes three important principles. First, there will be no losses for insured deposits. Last week’s aborted deal foolishly involved taxing them at 6.75 percent. Second, uninsured creditors rather than taxpayers will pay the entire cost of bailing out Cyprus’ two troubled banks – Cyprus Popular Bank (CPB) and Bank of Cyprus (BOC). Third, Cyprus’ oversized banking sector, which depended heavily on somewhat dubious Russian cash, will be slimmed down.

Cyprus must avoid capital controls

Hugo Dixon
Mar 24, 2013 16:31 UTC

Imposing capital controls would be a historic mistake for Cyprus and the euro zone – even worse than the crass idea of taxing uninsured deposits. Non-cash transactions would be limited, while withdrawals from cash machines would be rationed.

This would be equivalent to Argentina’s “corralito”, which lasted a year in 2001/2002. If capital controls are imposed, it will be almost impossible to lift them because people will stampede for the exits once they are removed. But such heavy-handed rationing of limited cash would clobber an economy which is already heading for a slump.

Some people will say that Cyprus has already endured a week of capital controls because of the extended bank holiday since last weekend’s botched bailout. But officially imposed indefinite capital controls – blessed by the euro zone and the International Monetary Fund – would be far worse.

Cyprus will pay dearly for its sins

Hugo Dixon
Mar 22, 2013 11:07 UTC

Cyprus will pay dearly for its sins. The Mediterranean island has committed many follies over the years – and is still making mistakes.

The Cypriots seem congenitally inclined to overestimate their negotiating position. In recent years, their first big folly was to reject in 2004 the United Nations plan for uniting their island. That irritated their European Union partners, meant that Cyprus still has a weak strategic position vis-à-vis Turkey and leaves a jagged scar across the island.

The last Communist government was also criminal in its failure to act as the crisis in Greece threatened to swamp Cyprus. If it had been willing to restructure the banks, the Cypriot economy would now be in a lot better shape. It was also much easier to do a deal with Germany then than now, when Angela Merkel is only months away from an election.