Opinion

Hugo Dixon

How to legitimise EU: decentralise

Hugo Dixon
Jul 22, 2013 08:41 UTC

The European Union is facing a crisis of legitimacy. This is evidenced in a decline in support for the EU among citizens in pretty much every member country. The most extreme manifestation is in the UK, where pressure is mounting to quit the EU.

There are two main schools of thought about how to restore trust in Brussels. One is to increase the direct say citizens have over what the European Commission does – say by giving yet more power to the European Parliament or by having a directly elected European Commission president. The other is to stop Brussels interfering in things best left to nation states.

The former school of thought is based on a misconception. The EU does not have a demos: few Europeans feel European rather than Italian, German, French or whatever. Witness the low turnout for European Parliament elections. Trying to construct a democracy without a demos is artificial and so won’t solve the legitimacy problem.

The better option is to decentralise decision-making to nation states. That will bring power closer to the people.

This is the thinking behind the Dutch government’s recent call for an EU based on the principle “European where necessary, national where possible”. It concluded that the time of an “ever closer union”, a key phrase in the EU treaty, in every possible policy area is over. The UK government’s review of the Commission’s “competences” – a word for its powers, not for whether it is discharging them competently – is motivated by a similar desire. The first results of this review are due later this week.

Italy’s Letta makes best of bad job

Hugo Dixon
Jun 24, 2013 08:26 UTC

Italy’s new prime minister, Enrico Letta, is making the best of a bad job. After February’s inconclusive election, it looked like Italy’s dysfunctional political system might drag the country further into the abyss. There was a risk that nobody would be able to form a government, new elections would be called and that even these would end in a stalemate.

In the end, a grand coalition was formed involving Letta’s centre-left Democrats, Silvio Berlusconi’s centre-right PDL and Mario Monti’s centrist group. Putting together such a coalition was itself an achievement – given that the Democrats and Berlusconi hate one another and that the Five Star Movement, led by comedian Beppe Grillo, refused to make deals with anybody.

Even after the coalition was formed – largely as a result of pressure from Giorgio Napolitano, Italy’s respected octogenarian president – there wasn’t much hope that it could achieve anything. But Letta has been quietly getting on with reform, as I discovered when I spent a few days in Italy last week. Part of the explanation is that he is an intelligent, modest, consensus-builder rather than a charismatic figure with a big ego.

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.

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.

Italy could do with market pressure

Hugo Dixon
Apr 15, 2013 09:34 UTC

Italy could do with some market pressure. Rome’s bond yields are now lower than they were before February’s inconclusive election. But as the politicians scheme, the economy burns. With markets calm, there is insufficient urgency to crack on with long-needed economic and political reform.

The fall in 10-year bond yields, which were 4.3 percent on Friday compared to 4.4 percent just before the election, is attributable to two factors. First, nobody wants to bet against the European Central Bank which has promised to do whatever it takes to preserve the euro. Second, the Japanese central bank’s pledge to buy gigantic quantities of bonds at home has buoyed asset prices elsewhere, including in Italy.

The backdrop to the current political crisis is starkly different to that in November 2011, when a sharp increase in bond yields created a panic which led to Silvio Berlusconi being forced out of office. Now none of the three main political blocs – Berlusconi’s centre-right group, the centre-left Democrats and Beppe Grillo’s 5-Star Movement – can govern on its own. But seven weeks have been wasted without a coalition being formed.

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 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.

ECB and euro governments play chicken

Hugo Dixon
Jun 4, 2012 08:20 UTC

The euro zone crisis is a multi-dimensional game of chicken. There isn’t just a standoff between the zone’s core and its periphery; there is also one between the European Central Bank and the euro zone governments over who should rescue the single currency. In such games somebody usually blinks. But if nobody does, the consequences will be terrible.

The brinkmanship between the governments is over how much help the northerners, led by Germany, should give the southerners. The core is effectively threatening the peripheral countries with bankruptcy if they don’t cut their deficits and reform their economies. The periphery is saying that, if they collapse, so will the entire single currency which has been so beneficial to Germany’s economy. The game is being played out transparently in Greece and covertly in Spain.

But even if the core eventually decides to help the periphery, there is a struggle of whether the aid should come from governments or from the ECB. Politicians would like the central bank to do the heavy lifting to avoid having to confront taxpayers with an explicit bill. But the ECB doesn’t think it is its job to help governments, arguing that such support violates the Maastricht Treaty.

Greece needs to go to the brink

Hugo Dixon
May 28, 2012 09:39 UTC

Greece needs to go to the brink. Only then will the people back a government that can pursue the tough programme needed to turn the country around. To get to that point, bailout cash for both the government and the banks probably has to be turned off.

It might be thought that the country is already on the edge of the abyss. This month’s election savaged the two traditional ruling parties which were backing the bailout plan that is keeping the country afloat. Extremists of both right and left gained strength – voters liked their opposition to the plan. But nobody could form a government. Hence, there will be a second election on June 17.

Will this second election express the Greeks’ desire clearly: stick with the programme and stay in the euro; or tear up the plan and bring back the drachma? That is how Greece’s financial backers in the rest of the euro zone, such as Germany, are trying to frame the debate. But the electorate doesn’t yet see the choice as that stark. Roughly three quarters want to stay with the euro but two thirds don’t want the reform-plus-austerity programme.