By Hugo Dixon
Hugo Dixon is Editor-at-Large, Reuters News. The opinions expressed are his own.
Both continental European euro-enthusiasts and British Conservatives received a boost last week when the German and UK finance ministers called for a rewrite of the European Union’s treaties. The goal, outlined by Wolfgang Schaeuble and George Osborne, is to kill two birds with one stone: shore up the euro zone and keep Britain in the EU.
The case for looser monetary policy should be clear when the European Central Bank governing council convenes in Frankfurt on Thursday. The question is what tools to use: lower interest rates, spraying the banks with more cheap long-term money or the ECB’s first dose of “quantitative easing”. The answer should be a mixture of all three.
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.
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.
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.
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.
The euro crisis is to a great extent a confidence crisis. Sure, there are big underlying problems such as excessive debt and lack of competitiveness in the peripheral economies. But these can be addressed and, to some extent, this is happening already. Meanwhile, a quick fix for the confidence crisis is needed.