Hugo Dixon

Matteo Renzi’s Plan A is to push through domestic reforms, hope the European Central Bank manages to get inflation ticking up, and keep his fingers crossed the Italian economy stops shrinking. But if this fails, a mega wealth tax, debt restructuring and/or exit from the euro beckons.

There is no Plan B that wouldn’t tip both Italy, where I spent part of last week, and its neighbours into a severe crisis. That makes it all the more important that Plan A works.

Renzi has been doing a reasonable job since he took over as prime minister in February. He has boundless energy and is not afraid of fighting battles. The latest has been to reform the labour market – something that involved clashing with members of his own centre-left Democratic Party as well as its trade union backers. Last week, he had to call a vote of confidence to push the change through the Senate.

Important reforms of civil justice, the electoral system and the constitution have also started. All this is necessary to make Italy governable as well as a country in which business wants to invest.

The snag is that the prime minister is better at announcing reforms than delivering them. This is partly a function of Italy’s stifling bureaucracy which, to be fair, he is trying to kick into action. But it is also because of his own failings.

How should companies manage a crisis? Tesco is the latest large corporate to go through the wringer after it revealed last month that it had overstated its half-year profit estimate by 250 million pounds. The Financial Conduct Authority has started a probe and speculation is swirling that the UK retailer may need a rescue rights issue.

Tesco’s travails offer a case study about what to do (and what not to do) when disaster strikes. Two other big UK corporate crises – the ones that afflicted Barclays following the Libor interest-rate scandal in 2012 and BP after its Macondo oil rig blew up in 2010 – back up these lessons.

The main one is to take things seriously and apologise. Tesco is doing better on this score than either BP or Barclays did. The UK retailer immediately suspended four senior executives and called in an independent firm of accountants to investigate. A month earlier, after an earlier profit warning, it cut its dividend by 75 percent.

What should the West’s military policy be toward Islamic State?

Most observers fall into two camps. Some point to the sorry history of Western intervention in the Middle East and argue the job of combating the Islamic State should be left to local powers.

Others say the West, led by the United States, should be more active in fighting the insurgents. Only the West has the firepower to defeat the group, the argument goes, and it has a responsibility to fix what it has broken as well as a strategic interest in stopping the Islamic State militants from becoming more powerful and dangerous.

But there is a third, better alternative: make the West’s help conditional on local powers taking the main responsibility for dealing with the Islamic State threat. That doesn’t just mean fighting the jihadists. It means also not fighting each other. If the United States, Britain, France and others start throwing their weight around, the risk is that regional players will be under less pressure themselves to make difficult compromises.

By Hugo Dixon

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

The UK faces an unpalatable choice in next May’s general election. The Labour opposition, which is currently ahead in the polls, has a somewhat anti-business agenda. Meanwhile, the Conservatives want to hold a referendum on Britain’s EU membership. If the people vote to quit the EU, industry will lose full access to its biggest external market.

To many in business, the choice seems like one between the devil and the deep blue sea. It’s not quite that bad. But Britain risks being stuck with a government that damages its economy.

By Hugo Dixon

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

With Scotland voting to stay part of the United Kingdom, attention will turn to the next potential British referendum: on whether the country will remain in the European Union. David Cameron has promised to hold an In/Out referendum on the EU if he is re-elected as prime minister in next year’s general election. There are comparisons and contrasts between the two votes, as well as lessons to be learned.

If Scotland had voted to quit Britain, the influence of both Scotland and the rump UK would have been diminished. Scotland’s economy would have been damaged. The divorce would also have been acrimonious.

By Hugo Dixon

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

One of the biggest projects for the next European Commission, which takes office in November, will be to create a “capital markets union.” President-elect Jean-Claude Juncker last week gave Britain’s Jonathan Hill the task of creating such a union “with a view to maximising the benefits of capital markets and non-bank financial institutions for the real economy.”

The prime goal of capital markets union should be to develop healthy sources of non-bank finance that can fund jobs and growth. The European Union suffers from clogged up and fragmented capital markets, which are a fraction of the size of their U.S. equivalents. Changing this is vital because banks, especially in the euro zone periphery, are on the back foot and not able to finance a recovery on their own.

Brexit risks have shot up in the past few weeks. The chance of Britain exiting the European Union by the end of the decade is now probably around 50 percent.

The main factor driving Brexit is the knife-edge referendum on Scottish independence. If the Scots vote next week to quit the United Kingdom, it is highly likely that the rump UK will leave the EU. If the UK doesn’t break up, it is much less likely that it will then part from the EU, but this is still a risk.

Financial markets are finally waking up to the risk of a “Scoxit” for the pound, gilts and the UK economy. They are also worrying about the knock-on effect in Spain, where the Catalan regional government wants to hold its own referendum on independence.

Europe is currently conducting two stress tests. One is on its energy suppliers, to see how badly they would fare if Russian gas was disrupted. The other is on euro zone banks, to ensure they are strong enough to finance economic recovery.

It is hard to know which of the two is the more important. But it is clear that an effective regime for energy security requires many of the same elements as financial stability.

One is the need for credibility in the stress tests. Europe flunked its original bank assessments by modelling scenarios that weren’t sufficiently stressful. The new test being conducted by the European Central Bank looks more credible.

The outgoing president of the European Council, Herman Van Rompuy, said at the weekend that his successor, Donald Tusk, currently Poland’s prime minister, faces three big challenges: the stagnating euro zone economy; the Ukraine/Russia crisis, which he described as the gravest threat to continental security since the Cold War; and the risk that Britain will quit the European Union. The problems are all linked.

Euro zone weakness is one reason the EU is reluctant to take action against Russia. GDP growth, already anemic, ground to a halt in the second quarter. The inflation rate has fallen again, to just 0.3 percent, and the unemployment rate is stuck at 11.5 percent.

With Italy in its third recession in recent years, Germany shrinking and France flat, this is no longer a crisis of what used to be called the “little PIGS” – Portugal, Ireland, Greece and Spain. It might be best to use a new acronym “FIG” to describe the travails of the big three.

Euro zone policymakers may feel they can afford to relax this summer. That would be a terrible error. The euro crisis is sleeping, not dead.

The region is suffering from stagnation, low inflation, unemployment and debt. The crisis could easily rear its ugly head because the euro zone is not well placed to withstand a shock.

What’s more, it’s not hard to see from where such a blow could come. Relations with Russia have rapidly deteriorated following the downing of the Malaysia Airlines flight over Ukraine. If Europe imposes sanctions that make Moscow think again, these will hurt it too.