Christopher Howarth is a senior Political Analyst at the think tank Open Europe. Prior to Open Europe he worked as a Conservative Foreign Affairs Adviser and senior researcher to a Shadow Europe Minister. Follow Open Europe on Twitter.
Over the weekend, Eurozone finance ministers put together a €10bn rescue package for the Cypriot economy. However, the deal has a sting in the tail: all deposits held in Cypriot banks will now have between 6.75 – 9.9% removed/taxed/stolen (delete as appropriate) from them – although the details are still being argued over.
There are two clear messages we can take from this. Firstly, having your own currency is vital to retaining sovereignty and that by getting into debt, either as an individual or a state, you lose your independence. Secondly, although some may argue that the injustice metered out to Cypriot depositors foretells the end of the euro, do not write the euro off yet – there is no settled body of opinion in favour of its repudiation in any state (or importantly the Cypriot parliament) and fears of depositor-backed contagion in other parts of the eurozone are (fortunately) overstated.
But what caused Cyprus’ financial crisis? In Germany, the narrative is that it was Cypriot government overspending and its banking system’s reliance on ‘hot’ Russian money. That narrative sets Cyprus up for its medicine: as German Chancellor Angela Merkel explains, “those responsible will contribute in it, not only the taxpayers of other countries, and that is what’s right.” But that obscures the fact that what did for Cyprus (and Spain) was not government debt, or a surplus of depositors, but bank lending secured on a property bubble. For Cyprus, losses on the Greek economy, property and bonds were the immediate cause of its crisis. If Cyprus had its own currency it could (like Iceland before it) have devalued, and (like the UK) have recapitalised its banks via quantitative easing – but it does not.
So is this deal the best plan on offer? Well, it could be worse: unlike in Greece, following the deal, Cypriot debt will come down to around 100% of its GDP. This means that Cyprus has a better chance of avoiding continued austerity and increasing debt that Greece has been forced to swallow (Greek debt is now at 160% of GDP this year). So could this be the lesser of two evils?
Perhaps, but if it is expedient it has created some serious injustices. A levy on bank deposits obviously attacks people who happen to have money deposited. Imagine you just sold your house and were caught out with the majority of your wealth temporarily in a bank? Remember, too, that Cypriot President Nicos Anastasiades explicitly promised in his election campaign, only a few weeks ago, that depositors were safe. To make matters worse, deposits under €100,000 are supposed to be protected by EU law, not raided by EU leaders. And Cypriot banks have frozen close to €5.8bn, i.e. imposed capital controls which are meant to be illegal under EU single market rules. It is difficult to argue this is legally fair or just. Give a man a gun and he can rob a bank, give a state a bank and…
In the UK, we have held interest rates at a record low even while inflation continues above target. Over time the value of our bank deposits have reduced. If low interest rates and quantitative easing have helped support house prices and keep borrowing costs down for those saving for retirement this has, like the Cypriot levy, hit them hard. But what is potentially politically toxic about the Cypriot situation is its overnight nature.
What does the debt deal mean for the EU? The UK is, fortunately, not a party to eurozone politics, but this deal is likely to entrench the eurozone’s North-South stand-off, representing a victory for the German government and German taxpayers over their southern counterparts – there are German elections in September. The Cypriot parliament will now vote on the deal tomorrow. The parties which support Cypriot President Anastasiades hold 28 out of 56 MPs, so not a majority – but Anastasiades has issued a stark warning: accept the bailout deal or face “a complete collapse with a possible exit from the euro”. Given that Cypriots do not wish to leave the euro they will, bar a spectacular upset, vote for the deal. The euro will live to see another day.