Opinion

Hugo Dixon

EU needs more non-bank finance

Hugo Dixon
Jun 2, 2014 08:40 UTC

The European Union needs more non-bank finance. Banks are on the back foot. On their own, they won’t be able to fund the jobs and growth the EU is desperate for. Non-bank finance needs to take up the slack.

The European Central Bank and Bank of England have made a good start by identifying the importance of reviving securitisation – the process of packaging loans into bond-like securities which can then be traded on the market. The two central banks have just published a joint paper describing blockages in the system which have all but killed EU securitisation since the financial crisis.

But securitisation is only one piece of the non-bank finance landscape. Similar leadership is needed to invigorate venture capital, equity investment, bond issues for small companies, shadow banking and so forth.

Following the financial crisis, securitisation – in common with other types of market-based finance – has had a bad name. This is only partly deserved. Securitisation certainly shares the blame for the U.S. subprime crisis that triggered the global credit crunch. Banks didn’t just originate mortgage loans and sell them off to third-party investors – something sometimes described as “plain vanilla” securitisation. They engaged in increasingly exotic and wild practices.

Not only did the banks lend to borrowers who were unable to service their loans. They constructed opaque financial instruments – sometimes securitisations of securitisations – in the hope of jacking up promised returns.

Scoxit could lead to Brexit

Hugo Dixon
May 12, 2014 08:55 UTC

By Hugo Dixon

Hugo Dixon is Editor-at-Large, Reuters News. The opinions expressed are his own.

If the Scots vote to leave the UK in September, that could trigger a chain reaction which leads to the rest of the UK quitting the European Union. This is a threat British pro-Europeans need to take seriously given that a Scottish independence vote is quite possible, though the chances are still less than 50 percent.

Were it not for the Scotland factor, the risk of a so-called Brexit – Britain’s exit from the EU – would be receding. A string of business leaders have in recent months come out and argued that the economy would be damaged if the UK lost full access to the EU’s single market.

Don’t bet on EU treaty change

Hugo Dixon
Mar 31, 2014 09:14 UTC

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 entente is significant. German-UK relations have certainly warmed since December 2011, when London tried to block one of Berlin’s pet projects – a treaty that restricted borrowing by euro zone countries – unless it was given guarantees to protect the City of London.

But have the two countries really found a formula that simultaneously solves the EU’s two main problems? There are reasons to be sceptical.

How EU can wean itself off Russian gas

Hugo Dixon
Mar 24, 2014 10:10 UTC

European Union leaders at the summit last week made a commitment to cut their dependency on Russian gas. The Ukraine crisis has highlighted the issue: about 30 percent of the gas the EU consumes comes from Russia.

Not that there is any immediate risk of the Kremlin turning off the taps. After all, Russia gets around 14 percent of its entire export earnings from gas it sells to other European countries.

What’s more, the EU is better placed to withstand a disruption of gas supplies than it was in 2009 when Moscow last cut off gas supplies to Kiev. Then 80 percent of Russian gas was routed via the Ukraine, according to the Oxford Institute for Energy Studies. Now it is around 50 percent, largely because of a new pipeline that connects Russia to Germany via the Baltic Sea.

Cameron lowers Brexit risk

Hugo Dixon
Mar 17, 2014 11:28 UTC

Angela Merkel’s visit to the UK last month seems to have worked wonders. Within three weeks of the German chancellor’s speech to the House of Commons and her private meetings with political leaders, the two most risky “Brexit” scenarios are now less likely.

First, the Labour opposition has virtually ruled out holding a referendum on Britain’s European Union membership if it wins power in 2015. Such a plebiscite might well have led to an Out vote given that, in such a scenario, the Tory party and press could have formed a united front opposing membership.

The second risky scenario was that David Cameron would win reelection and set “impossibilist” demands for how he wanted to reform Britain’s relationship with the EU. But he has just come out with a list of reforms which, while wishy-washy, are moderate. He has also said that, if he gets his way, he will campaign for an In vote – which means the people are less likely to vote Out.

Labour has just shrunk Brexit risks

Hugo Dixon
Mar 12, 2014 10:24 UTC

The risks of a Brexit have just shrunk a lot. Ed Miliband, the UK’s leader of the opposition, has virtually ruled out a referendum on Britain’s European Union membership if he becomes prime minister in 2015. David Cameron’s Conservatives will need to win an overall majority in the next general election and then lose an In/Out vote to allow the UK to quit before 2020.

This is good news for business: a plebiscite, coming after a populist campaign, might easily produce the “wrong” result. An Out vote would put Britain at risk of losing full access to the EU’s single market, with which it conducts almost half its trade. It would also unleash a long period of uncertainty. Whoever is prime minister then will have to resign, likely to be replaced by a staunch eurosceptic who will then engage in acrimonious divorce talks with the rest of the EU. In the meantime, business would sit on its hands, and the economy suffer.

Meanwhile, Miliband’s priorities for reforming the EU – boosting competitiveness, tackling youth unemployment, completing the single market and decentralising power – are broadly pro-business.

EU’s half-baked bank union could work

Hugo Dixon
Mar 10, 2014 16:12 UTC

The European Union’s half-baked banking union could be made to work – even though it wasn’t strictly needed to solve the euro zone’s problems and what has been agreed isn’t what the designers wanted.

The original advocates of banking union saw it as a way to prevent the euro collapsing during the dark days of early 2012. The idea was that a well-funded, euro-wide deposit insurance scheme would stop savers panicking. Meanwhile, if banks got into trouble, a strong euro-wide safety net would be able to bail them out.

During the crisis, savers and investors lost faith in the ability of weak governments to rescue their banks. That’s why banking union enthusiasts wanted euro-wide support systems.

How Britain could win EU reform

Hugo Dixon
Mar 3, 2014 10:41 UTC

Angela Merkel’s visit to London last week has been viewed by many as a snub to David Cameron’s aim to reform the European Union. But it all depends on what one means by reform.

The British prime minister last year promised a referendum on the UK’s membership of the EU by the end of 2017. He vowed to renegotiate Britain’s relationship with Europe in the meantime – the idea being that, on the back of such reforms, he would be able to persuade a sceptical electorate to vote to stay in.

If Cameron focuses on subjecting the EU’s treaties to open-heart surgery, he will be disappointed. But if he puts his energy into making the bloc more competitive – something that would be hugely beneficial for Britain – the prize of reform may well be within his grasp.

Euroscepticism may have silver lining

Hugo Dixon
Feb 10, 2014 09:43 UTC

Many eurosceptic treatises, such as the recent report saying the Netherlands would be better off quitting the European Union, are exaggerated and unconvincing. But mounting euroscepticism could still have a silver lining if it helps those wishing to reform the EU advance their agenda.

Few people think the Netherlands is close to quitting the EU. In this way, it is different from the UK, where exit is a genuine possibility. That said, euroscepticism is on the rise following years of economic stagnation. The right-wing Freedom Party, led by Geert Wilders, is leading in the opinion polls and is likely to be the largest party in May’s European Parliament elections. Other eurosceptic and nationalist parties such as France’s National Front and Britain’s UK Independence Party are also likely to perform well.

To see what is wrong with the eurosceptics’ arguments, look no further than the study on “Nexit” – the Netherlands’ potential exit from the EU – commissioned by Wilders and written by Capital Economics, a London-based consultancy. Although the case for Nexit has been dressed up about as well as it is possible to do so, it is still full of holes.

UK Tories mishandle EU relationship

Hugo Dixon
Jan 23, 2014 10:16 UTC

A year after David Cameron promised a referendum on EU membership, the British prime minister and his Conservative party are alienating potential allies across the Channel. He needs to pitch reforms that benefit the whole bloc, not just pander to eurosceptics. Otherwise an “Out” vote looks more likely.

Cameron promised to hold a referendum by the end of 2017, assuming he’s still in power. His original hope was to first renegotiate the terms of Britain’s EU membership sufficiently so that he could then sell the advantages of staying in to a sceptical electorate.

In such a scenario, the expectation was that much of Tory press would rally round – or at least mute their criticism. Meanwhile, business would campaign to stay in, alongside the Liberal Democrats, the junior partners in Cameron’s coalition, and the opposition Labour party.