Opinion

Hugo Dixon

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.

Hence, the plan by 11 EU countries (not including the UK) to apply a tax on all financial transactions. Hence, too, the recent decision to cap bankers’ bonuses thoughout the EU (against London’s objections) and a scheme, so far not agreed, to do the same for fund managers.

The oddity about these rules is that they do nothing to address the causes of the financial crisis. Trading in financial instruments wasn’t responsible for the crisis. Nor were fund managers. And while banker compensation does bear some of the blame, the so-called solution is cock-eyed. Banks will react to bonus limits by pushing up fixed salaries – something which will make their finances more vulnerable when the next crisis hits.

Italy could reignite euro crisis

Hugo Dixon
Feb 26, 2013 10:15 UTC

Can the Italians be serious? That is likely to be the reaction of financial markets and the country’s euro zone partners as they ponder a disastrous election result, which could reignite the euro crisis. More than half of those who voted chose one of two comedians: Beppe Grillo, who really is a stand-up comic; and Silvio Berlusconi, who drove Italy to the edge of the abyss when he was last prime minister in 2011. Both are anti-euro populists.

This comedy could easily end in tragedy. The inconclusive result has echoes of last year’s first Greek election – except that Italy is bigger and more strategic. The country faces political paralysis, while its economy is shrinking and its debt is rising. The European Commission forecast last week that GDP would fall a further 1 percent this year after last’s year 2.2 percent drop. Debt, meanwhile, would reach 128 percent of GDP by the end of this year.

The euro crisis went into remission after the European Central Bank’s president Mario Draghi promised last summer to do “whatever it takes” to preserve the single currency. But, if Italy proves ungovernable during this critical time, even the ECB’s safety net may not work.

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.

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.

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.

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.

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.

Can EU defend supranational interests?

Hugo Dixon
Sep 17, 2012 09:56 UTC

European integration tends to advance first with squabbling then with fudge. Every country has its national interest to defend. Some politicians appreciate the need to create a strong bloc that can compete effectively with the United States, China and other powers. But that imperative typically plays second fiddle to more parochial concerns with the result that time is lost and suboptimal solutions are chosen.

Amidst the europhoria unleashed by the European Central Bank’s bond-buying plan, it is easy to miss the immense challenges posed by two complex dossiers that have just landed on leaders’ desks: the proposed EADS/BAE merger; and a planned single banking supervisor.

Look first at the plan to create a defence and aerospace giant to rival America’s Boeing. This has been under discussion since at least 1997 when the UK’s Tony Blair, France’s Jacques Chirac and Germany’s Helmut Kohl called on the industry to unify in the face of U.S. competition. London, Paris and Berlin are the key players in this game because they have the major assets.

How to clean the banking cesspit

Hugo Dixon
Aug 6, 2012 08:29 UTC

Five years after the credit crunch erupted in August 2007, banking still looks like an industry running amok. Scandals keep tumbling out of the closet: an alleged ring of banks including Barclays that attempted to rig interest rates; money laundering by HSBC; insider tips passed by Nomura to its clients; and terrible risk management by JPMorgan, where traders have so far lost $5.8 billion.

True, some of these scandals date from the rip-roaring days of the bubble. And the industry is now being reformed. But the public is growing impatient with the slow pace of change, especially as recession bites in large parts of the industrialised world. Some observers therefore want to clear out the entire old guard. The idea is that only new teams can clean the cesspit. There are also increasing calls to break up banks into supposedly low-risk retail banks and casino-style investment banks. Even Sandy Weill, the man who created Citigroup, now advocates splitting up financial conglomerates.

Something must be done. The financial industry has made a mockery of capitalism. Despite endless bailouts, bankers are still paid far too much. Profits are privatised, while losses get socialised.

How 50 bln euros might save the euro

Hugo Dixon
Jun 25, 2012 10:16 UTC

The break-up of the euro would be a multi-trillion euro catastrophe. An interest subsidy costing around 50 billion euros over seven years could help save it.

The immediate problem is that Spain’s and Italy’s borrowing costs - 6.3 percent and 5.8 percent respectively for 10-year money - have reached a level where investors are losing confidence in the sustainability of the countries’ finances. A vicious spiral - involving capital flight, lack of investment and recession – is under way.

Ideally, this week’s euro summit would come up with a solution. The snag is that most of the popular ideas for cutting these countries’ borrowing costs have been blocked by Germany, the European Central Bank or both.