Opinion

Hugo Dixon

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.

The next election is unlikely to resolve this inconsistency – or at least that is the conclusion I came to from a trip to Athens last week. The battle for first place is between Alexis Tsipras, the young leader of the radical left SYRIZA party, and the centre-right New Democracy party led by Antonis Samaras.

A victory for Samaras might seem to offer the hope that Greece will stick with the programme and the euro. He has, after all, campaigned for both. However, even if he comes first – which he did in this month’s election – he will not have a parliamentary majority. He will either have to stitch together a majority coalition or govern a minority government. Neither is the recipe for a strong government.

How to protect euro from Greek exit

Hugo Dixon
May 14, 2012 08:51 UTC

When euro zone policymakers are asked if there is a Plan B to cope with a Greek exit from the single currency, their typical answer goes something like this: “There’s no such plan. If there were, it would leak, investors would panic and the exit scenario would gather unstoppable momentum.”

Maybe there really is no plan. Or maybe policymakers are just doing a good job of keeping their mouths shut. Hopefully, it is the latter because, since Greece’s election, the chances of Athens quitting the euro have shot up. And unless the rest of the euro zone is well prepared, the knock-on effect will be devastating.

The Greeks have lost their stomach for austerity and the rest of the euro zone has lost its patience with Athens’ broken promises. But unless one side blinks, Greece will be out of the single currency and any deposits left in Greek banks will be converted from euros into cut-price drachmas.

Three bad fairies at euro feast

Hugo Dixon
Jan 30, 2012 10:42 UTC

Investors are feeling more optimistic about the euro crisis. So are policymakers. That much was evident last week at the World Economic Forum’s annual meeting in Davos. There was much satisfaction over the early performance of the Super Mario Brothers – Mario Draghi, president of the European Central bank, and Mario Monti, Italy’s prime minister. What’s more, a deal may be in the works to build a bigger firewall against contagion, constructed out of commitments from euro zone members and the International Monetary Fund. And it looks like there will be another short-term fix for Greece.

But three bad fairies were lurking at the Davos feast. Spain and France are relatively new problems and Greece is an old one. All three are powerful menaces.

Madrid is staring at a particularly vicious version of the austerity spiral afflicting most of the euro zone. The last government missed its fiscal targets, leaving the country with a budget deficit of 8 percent of GDP in 2011. The programme agreed with the European Union commits Spain to cutting this to 4.4 percent in 2012. Doing so would be hard in good times. Trying to reach this target when GDP is set to shrink by at least 1.5 percent and the unemployment rate is already 23 percent would be nearly suicidal.

Europe’s Sisyphean burden

Hugo Dixon
Jan 16, 2012 10:43 UTC

Watch Athens more than Standard & Poor’s. The biggest source of immediate trouble for the euro zone could be the one country the ratings agency didn’t examine in a review that led to the downgrade of France and eight other states. Even if the short-term shoals can be navigated, the rest of the zone won’t find it easy to get by Greece.

The points S&P made when stripping France and Austria of their triple-A ratings and knocking two notches off the ratings of the likes of Italy and Spain were valid. It is true, for example, that policymakers can’t agree what to do to solve the euro crisis and that “fiscal austerity alone risks becoming self-defeating.” But these points, as well as the prospect of S&P downgrades, were already in the market.

Meanwhile, what Mario Draghi said last week about “tentative signs of stabilization” is true. The European Central Bank (ECB), over which Draghi presides, is itself partly responsible for that stabilization by virtue of providing 489 billion euros of three-year money to banks just before Christmas. Mario Monti’s promising beginning as Italy’s prime minister is the other main factor. The Super Mario Brothers have got off to a good start.

The euro zone’s self-fulfilling spiral

Hugo Dixon
Nov 20, 2011 20:41 UTC

When confidence in a regime’s permanence is shaken, it can collapse rapidly. The fear or hope of change alters people’s behavior in ways which make that change more likely. This applies to both political regimes such as Hosni Mubarak’s Egypt and economic regimes such as the euro.

Fear that the single currency may break up now risks becoming a self-fulfilling prophecy. Banks and investors are beginning to act as if the single currency might fall apart. Politicians and the European Central Bank need to restore belief that the single currency is here to stay. Otherwise, it could unravel pretty fast.

Until a few weeks ago, the idea that the euro wouldn’t survive the current debt crisis was a fringe view. Since the euro summit on Oct. 26-27, it has become a mainstream scenario. So much so that last week risk premiums on the bonds of even triple-A rated countries such as France and Austria rose to record levels, while Spain became the latest country to be sucked into the danger zone.

Chaotic catharsis

Hugo Dixon
Nov 7, 2011 02:31 UTC

Chaos, drama and crisis are all Greek words. So is catharsis. Europe is perched between chaos and catharsis, as the political dramas in Athens and Rome reach crisis point. One path leads to destruction; the other rebirth. Though there are signs of hope, a few more missteps will lead down into the chasm.

The dramas in the two cradles of European civilization are similar and, in bizarre ways, linked. Last week’s decision by George Papandreou to call a referendum on whether the Greeks were in favor of the country’s latest bailout program set off a chain reaction that is bringing down not only his government but probably that of Silvio Berlusconi too.

The mad referendum plan, which has now been rescinded, shocked Germany’s Angela Merkel and France’s Nicolas Sarkozy so much that they threatened to cut off funding to Greece unless it got its act together — a move that would drive it out of the euro. But this is probably an empty threat, at least in the short term, because of the way that Athens is roped to Rome. If Greece is pushed over the edge, Italy could be dragged over too and then the whole single currency would collapse. So, ironically, Athens is being saved from the immediate consequences of its delinquency by the fear of a much bigger disaster across the Ionian Sea.

The euro and the Hotel California

Hugo Dixon
Oct 26, 2011 15:26 UTC

The euro zone is like Hotel California, UBS wrote in a report published in September. “You can check out any time you like but you can never leave,” it said, quoting the Eagles song. A British businessman, Simon Wolfson, has now offered a 250,000 pound prize to the person who can come up with the most convincing explanation of how an orderly exit from the single currency is possible.

The problem is the word “orderly.” There are lots of scenarios where a country such as Greece could quit the euro in a disorderly fashion, destroying its own economy and that of its neighbous as well as possibly plunging the world into a recession. But how is it possible to do this without triggering financial Armageddon?

The first difficulty stems from the fact that an exit couldn’t happen overnight. There is no legal procedure for a country to quit. Joining was supposed to be an irrevocable commitment.