The future of the UK in the EU is, of course, already a subject of fierce debate. Everybody can see that the chances of a British departure have increased. The question is by how much.
I was interested to discover from a private conversation with a very senior continental official that his worry is that the rest of the EU really does not need this diversion of attention from its immediate concern, which is the reform of the eurozone.
He referred to two specific risks.
First, he is worried that the very fact that the UK may be on the way out will shake confidence in the future of the eurozone. As he noted, people in Asia or the Americas do not understand the details. They will just regard this British decision as calling into question the vitality of the European project, partly, no doubt, because the UK has deep relations with these parts of the world. Read more
The financial panics are over. Now we must deal with the longer-term aftermath.
I advanced this thesis at a private dinner last night and, to my surprise, Nouriel Roubini agreed with me. More precisely, he agreed that “tail risk” had been sharply reduced.
The big change of the last 12 months has, of course, been in the eurozone. This has something to do with policy improvements in vulnerable countries, particularly Italy and Spain. It has even more to do with the willingness of the European Central Bank, under the redoubtable Mario Draghi, to use its power to reduce break-up risk and offer potentially unlimited liquidity to banks and sovereigns under stress. Read more
Mood. The improvement in optimism at Davos is palpable from last year, as I argued before. Interestingly, the group showing the greatest caution seems to be the CEOs of non-financial corporates. My experience over the years is that these people are a lagging indicator. What drives them is their recent performance. However, there seems to me to be a real return of confidence among bankers, who are back in force. That does make me quite nervous. Read more
I have, as usual, succeeded in spending a day in Davos without attending a single public session. But I have managed to speak to several interesting people about the world economy. Read more