Who Will Pay for Cyprus?

Alphen, Netherlands.  19 March.  In “1984” George Orwell wrote, “Doublethink means the power of holding two contradictory beliefs in one’s mind, simultaneously, and accepting both of them”.  I was reminded of doublethink (to that add double-speak) watching Europe’s politicians and Eurocrats dance on the head of a political pin to distance themselves from the so-called ‘one-off’ Deposit Tax Levy Confiscation of ordinary Cypriot’s  money.  So, who will pay for Cyprus and will the money be put to good use?

 

The logic is brutal.  With Cyprus representing only 0.2% of the Eurozone economy, the Cypriot banking sector some 330% of Cypriot GDP and with 30% of deposits in Cypriot banks Russian (and much of it of very dubious provenance) Cyprus can only fund its side of the proposed €10 billion ($13 bn) bailout via bank depositors. 

Why this particular deal and why now?  For once the EU is being unfairly blamed for a crisis not of its making (aside from the fact that the Euro is a political project that does not work).  German Chancellor Angela Merkel, supported by her Finnish and Dutch counterparts, wants to demonstrate prior to the September German elections that she is being prudent with German taxpayer’s money.  And, under no circumstances must the bond markets be spooked so that the borrowing costs soar of the bigger Eurozone debtors such as Greece, Italy, Ireland, Portugal and Spain – at least not until after September. 

As of today all involved are either retreating fast from imposing the now infamous ‘haircut’ on the small depositor or blaming the Cypriots themselves for this disaster.  The suggestion is that depositors with over €20,000 ($26k) will now have 6.9% of their savings in Cypriot banks taken from them whilst those over €100,000 ($130k) will have 10% confiscated.  This means dodgy Russians and retired Brits neither of whom are hugely popular with those who run the Eurozone will be hit.

Would the money be put to good use?  Well, this reflects yet another fundamental untruth this crisis has spawned.  Yes, it is true that the northern, western European taxpayer has already paid a lot either funding or under-writing ‘loans’ that will never be repaid.  At the same time Berlin has done all it can to ring-fence its taxpayers and find other people to pay for a crisis that by and large had its origins in the ill-conceived leadership of Berlin, Brussels and Paris when the Euro was set up.  The half-measures under discussion simply prolong the agony and increase the costs which have effectively turned the EU into a mutual impoverishment pact.

Therefore, ‘haircuts’ will fail because they do not address the fundamental problem of the Eurozone; the need for tight and common fiscal discipline and structural reform of southern Eurozone economies.  In other words, the Euro will only ever be stable if there is real fiscal and banking union or if the Eurozone contracts into a customs zone of reasonably similar economies organised around Germany.  However, the former would demand the effective end of national sovereignty and democratic accountability, whilst the latter would see southern European economies cast out into the global economy and forced to compete.  That would make current austerity measures look like benign charity.

There is a more immediate consequence; the future cost of crisis-management will now inevitably grow.  This morning the spokesman of EU Council President Herman van Rompuy tried to play down the Cyprus crisis by suggesting it was a special case.  Special or not a clear message has been sent that future bailouts could well involve EU-inspired raids on the small savings of small people.  This will almost certainly mean that when the next crisis inevitably erupts in Spain, Italy or elsewhere people will rush to withdraw their savings from banks and thus triggering a massive banking run. It is banking runs that kill currencies.  In other words this proposal will make contagion more not less likely. 

So, making small depositors pay for the crisis makes little or no sense other than to stave off the immediate disaster.  Indeed, without federation or fracture the crisis cannot be resolved only temporarily contained.  Critically, the Cypriot fiasco reinforces the toxicity that is the political incompetence that created the Eurozone crisis and which is sustaining it.

Orwell also wrote in “1984”, “The choice for mankind lies between freedom and happiness and for the great bulk of mankind happiness is better”.  Sadly, as Cyprus reveals the Eurozone is generating neither freedom nor happiness, just fear.

Come September and the German elections these realities will have to be faced and the EU’s current phoney war will come to an end with a bang…if not before. 

Who will pay for Cyprus? All of us sooner or later.

Julian Lindley-French