What a weekend. The last two days have awakened the beast of the euro crisis once again and me too from a prolonged posting hibernation.
The latest developments regarding the bailout of Cyprus called for a brief commentary. My initial reaction to the news of the impairment of depositors of Cypriot banks was one of surprise and disgust for how the EU leadership continues to “manage” the crisis. But after a more thoughtful consideration, I find myself actually delighted of these developments and I will explain why in this post.
First, I was amazed to read that many news outlets found the decision bad and unfair, even traditional propaganda tools like the Economist (but not Spiegel). The common arguments revolve around the following facts:
- Bondholders of Cypriot banks do not get impaired. Neither do the ECB or the Central Bank of Cyprus (their exposure is collateralized, so they could stay with some rubbish collateral).
- Small deposit holders get disproportionately burdened with the cost of the bailout. The amount of their participation is totally arbitrary since it does not take actual income or total wealth into account.
- Those who were quick enough to pull their money from Cypriot banks when talks about depositors’ losses emerged got a free pass.
- The British Government will compensate British depositors. The Cypriot government cannot guarantee deposits in its own banking system and currency, but taxpayers in a non-euro country will pay for the euro deposits of their compatriots. Ludicrous.
- The decision creates a precedent of deposit impairments which might trigger bank runs or at least nervousness in other parts of the eurozone.
This is all quite clear and probably I would not be adding much to the discussion by providing my support to the arguments above. The thoughts that I want to share here are more general.
It is worth remembering how Cyprus found itself in crisis and what made its bailout politically more challenging. Even though Cyprus joined the euro just five years ago, it only found itself in crisis after the Greek debt restructuring of last year. That Greek debt restructuring that was delayed enough so that the systemically important banks of the eurozone’s core would offload their exposure to the official sector of the EU, under terms that would make default more difficult. The fact that the banks of Cyprus are systemically important for the economy of this small country of course did not matter then. Neither did it matter when the time came for Cyprus to ask for a bailout and when the savings of ordinary Cypriots were put at risk. Because systemic importance is one thing, cliques and vested interests are another.
Henceforth, I will refer to this collection of vested interests between the ECB, large core banks, the European Commission and the governments of Germany and its close allies (NL, FI, AT and LU) as “the Clique”. I know that the term gives an air of conspiracy theory (and I honestly dislike conspiracy theories in general) but then again, one must be darn stupid to believe that these parties have not found a common ground and a way to coordinate their actions and decisions in order to serve their own interests. The interlinkages are strong enough and the possible gains enormous.
The beautiful veil of virtue that this deposit impairment has been covered with is an example of these ways. Europe supposedly wanted to make sure that the bailout would not serve the interests of Russian oligarchs who use Cypriot banks for money-laundering reasons. Never has there been a talk within the EU about the other hideouts of Europe’s tax dodgers (like Luxembourg) or about the simple fact that banks all around Europe accept deposits of dubious legitimacy. Connecting the bailout of Cyprus with a crackdown on money-laundering operations should be very untimely given the immediate problems that the country’s financial sector faces, but not for the Clique who found this as an excellent excuse to justify the internalization of the losses within the country.
The eurozone has turned evidently into an economy and a society ruled by a few fascist central planners, who decide freely who earns and who loses what. The roles are clearly assigned and the rules pretty clear. The smaller and poorer a member is the more it will suffer in the hands of the rich and powerful members of this unholy union of expropriation. Cultural and moral excuses are used conveniently to justify economic decisions and legal matters, in true fascist tradition. If more evidence is necessary to expose the demise of democracy and the rule of law in Europe, this weekend’s decision provided yet another solid one.
So how could I be delighted by this development?
I am because this decision is another nail on the euro’s coffin. The euro crisis has always been different than what the media and politicians have described and its optimal solution should necessarily involve losses for the euro’s core, in one or another form. Such an optimal solution would be fair in spreading the losses evenly to those truly responsible, while ensuring at the same time the long-term prosperity of the euro area as a whole and across each and every member of it.
Alas, every decision-making process at a top European level excludes a priori the possibility of any losses to the core because the Clique does not allow for it, rendering an optimal solution unattainable. This has held true for each and every individual decision that relates to the euro crisis, whether about a country’s bailout, the formation of a banking union or whatever else tomorrow brings. The result of this misspecification of the euro’s problem is a vicious circle of suboptimal decisions which lead to new problems with only suboptimal potential solutions, and as time progresses, these possible solutions will be progressively worse. At some point, the problems that Europe is going to face and the proposed solutions to them will be so outrageous and ridiculous that not even the usual ECB joker will be able to relay to the public.
I believe that we are facing a moment like this now: a moment of heightened uncertainty, where a very bad decision was the best one to the problem at hand and where the parties involved are actively protesting against it or rush to amend it. It is a moment like this that will precipitate the eventual euro’s collapse.
With this in mind I am happy how things turned out this weekend. While I sincerely sympathize with the problems the Cypriots are going to face come Tuesday, a possible prolonged closure of the island’s banks under the uncertainty of the bailout terms and a potential implosion of their economy might jettison the country out of the currency block sooner than anyone could expect and trigger a collapse of the euro in avalanche speed. Chances are still slim, but the moment when the weaker members of the euro realize that they do have a choice seems nearer this Sunday.