Cyprus And The Death Throes Of The Eurozone



Just when you thought it was over, it all begins anew. Of course (please excuse me for bragging) I have to point out that I never thought it was over.

I am, of course, talking about the Eurozone crisis. Many thought it was over because we hadn’t heard anything about it in a while, but these people have most definitely been proven wrong in these past few days.

For those of you who haven’t followed the news, let me explain: Greece has been going through an economic and financial meltdown for over three years. A little known fact however is that this meltdown has also spread to the neighboring island nation of Cyprus.

For once, it is Cyprus, with 1 million inhabitants, who are in the news rather than their ne’er-do-well greek neighbors.

It doesn’t sound that bad at first: Cyprus needs a bailout – and why not? Bailing out countries has become a European tradition by now, plus the bailout they need (17 billion euro) is smaller than previous bailouts. There is really only a slight issue: There used to be SO much more money for bailouts before all the other countries received their bailouts. Plus Spain and Italy looks like they could use a hand pretty soon, so we really gotta ration our bailout money here in Europe.

So what to do? Let Cyprus fail, exit the Eurozone, and recover (yes, they would recover – we’ll get to that)? Nope, that would be inhumane. Instead, they decided to give Cyprus a bailout, but only under the condition that the Cypriot government agree to rob their citizens.

I’m not talking about simply raising taxes (though taxation may be seen as theft I guess) – I’m talking about sheer confiscation.

Yes, that’s right: The Cypriot government, in order to get a bailout, had to agree to take 6.75 % of all the money in the private savers’ bank accounts (9.9 % of all money above 100 000 euro). That is to say: If you had 100 000 euro in your bank account last friday, you’d have 93 250 euro left today. 1 euro is about 1.29 US Dollars.

Of course, this led to a bank run. Everyone tried to take out their deposits before they were gone. It shouldn’t surprise anyone that the lines to the ATMs have been long.

Again please note that this was not the initiative of the Cypriot government – rather, it was forced upon them by the EU. The idea apparently came from Finland (a note to my Scandinavian brothers: Please put down the Absolut Vodka bottle before you make economic policy recommendations. Actually, just stay in the sauna and let the rest of us sort this one out).

And then came the cliffhanger:

Cyprus, being a democratic country and everything, has a parliament. This parliament sort of wanted a say on whether or not the county should steal deposits from its hard-working citizens.

And by a say, I mean they didn’t agree to it at all and voted against it, 36-0 (with 19 abstaining).

This came as a complete shock to the EU, with German government officials complaining that Cyprus was turning away a helping hand. In Sweden, political commenters have tried to calm people down, saying there is no way the EU is simply going to kick Cyprus out. I think they’re missing the fundamental question: Does Cyprus really want to stay? Based on the 36-0 vote, which means that Cyprus won’t receive a bailout (unless the EU yields, see below) and will likely have to declare state bankruptcy shortly, I’d say the Cypriots and their representatives are getting very tired of the charade. It seems like they’d rather default, start over with a blank sheet and their own currency, and begin to take steps towards an economic recovery. Which brings us to…

Why leaving the Eurozone would lead to an economic recovery for Cyprus, and really any country that decides to leave

Almost no-one disputes that joining the Eurozone was a mistake for the southern European countries, in particular for Greece. However, most analysts on this issue talks about leaving the Eurozone as if it was some kind of “Nuclear option”, something that should be avoided as long as possible.

I honestly can’t see why that is, given that it’s obvious that Cyprus, and Greece, and all the other countries that are currently in a crisis would recover if they left the Eurozone.

Without the Euro, these countries would go back to having their own currencies. Currencies which, one might add, would depreciate quickly, boosting exports (and, in the case of Cyprus and Greece, tourism), reducing unemployment and increasing tax revenue.

For most of these countries – perhaps all of them – it will be too late to avoid a default. The deficits are simply too high, the burden of the already-existing government debt is simply too crushing for there to be much that can be done at this point.

So what is the point of leaving the euro? The thing is; default is virtually unavoidable at this point. Leaving the euro is the last chance to do something before it’s too late. It might not work, but at least you get the boost in exports and in employment in the export industries (which you are really going to need, given that defaulting means that spending will have to be cut dramatically, which means layoffs in the public sector).

But what about transaction costs? Won’t they be higher, if you’re no longer part of the currency union? Yes. But the depreciation will more than make up for this. The EU doesn’t want you to know about this, but the truth is that currency transaction costs (the bid/ask spread) have been falling for several decades. A currency union might have provided significant benefits in terms of reducing transaction costs back in the 1950′s, but not anymore.

The President of Cyprus, Nicos Anastasiades, warned that voting down the bailout package – including the confiscation of private savings – would lead to a total financial collapse and a Cypriot exit from the Eurozone. The problem is that the first one is going to happen anyway, and the second would actually, as shown above, be a good thing. Those who think that Cyprus, Greece and the others can recover economically without leaving the Eurozone fails to understand what the Eurozone is: It’s a union by Germans, for Germans. It’s a game that is rigged against the smaller countries, and so it’s not a coincidence that these countries are losing out. And their losing streak will continue as long as the map of Europe is depicted on their coins.

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What happens now?

Now that Cyprus has rejected the terms of the bailout, there are a few different options.

The above-mentioned President Anastasiades is in Russia right now, negotiating for a bailout from Russian natural gas company Gazprom (yes, that company is big enough to be able to bail out a nation). Gazprom has offered to restructure Cyprus banks, in exchange for exploration rights for natural gas. We don’t know yet how much money Cyprus might be able to get this way, but somewhere in the region of 10 billion seems reasonable.

Will the EU allow this? Russia is advancing in world politics because of the Eurozone crisis weakening Europe. There were actually talks of Russia bailing out Iceland back in 2008, so this move is not in any way unprecedented.

In addition to gaining political influence, this would benefit Russians who have savings held in Cypriot banks – and that’s not an insignificant number at all. You see, Cyprus is a bit of a tax haven, and as such it is a very popular place for Russian billionaires to keep their money. It’s a bit like a European Cayman Islands, you could say (though Cyprus, unlike Cayman Islands, does not rely entirely on the financial services sector).

Assuming this doesn’t play out, will the EU yield and give Cyprus a bailout, even without the deposit confiscation? I personally think that what the Eurozone leaders are the most afraid of right now is a country leaving the Eurozone – and then recovering economically! This would provide definitive proof that the Eurozone is a burden on the economies of its membership countries, and soon every economically troubled nation in the Eurozone would choose to leave (leaving maybe 2-3 countries).

So does this mean they will help Cyprus? I frankly don’t know, but what I picture is the EU will end up giving Cyprus “short-term help” (say, a 1-2 billion euro bailout, kicking the can down the road) while they work on bullying the Cypriot MPs into supporting the EU agenda.

In the meantime, expect things to get ugly in the other mediterranean countries. As Robert Tracinski, writing for RealClearPolitics said, the leaders of the EU have really showed their true colours:. They dropped the act, stopped pretending that they care about regular Europeans like myself and my classmates, and revealed what they would actually like to do: Confiscate the savings of hard-working Europeans to finance the wasteful spending of irresponsible politicians and bankers.

If they can do it in Cyprus – whether they succeed or not is irrelevant, the fact that they tried is enough – what is to say that they can’t do it elsewhere? Spain and Italy appear to be heading for bailouts. Expect bank runs in those countries if it looks as if a bailout is unavoidable. I actually wouldn’t be surprised if we were to see a massive capital flight from the crisis countries in the Eurozone. After all, deposit insurance is pretty much the only thing that has kept money in those countries in the first place. And, as we now know, that insurance isn’t worth the paper it was written on. What we are witnessing can only be described as the death throes of the Eurozone.

Will the US be affected? I don’t see the US being immediately affected by this. Of course, a collapse of the Eurozone would bring down the US economy as well (just like the US financial collapse of 2008 brought down Europe). In the meantime, Americans should focus on understanding the Eurozone crisis and what will happen if the Eurozone goes down. I’m surprised by how the Eurozone crisis has been ignored in the US – it was barely mentioned at all in last year’s presidential campaign. I’m afraid pretty soon these issues will be impossible to ignore, even for American politicians who’d rather talk about amnesty and 16-ounce sodas.

That’s it for tonight. Thank you for reading.

Photo credit: Draig via Flickr (CC-By-NC 2.0)

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  • Sagi

    Had a great time with the “Please put down the Absolut Vodka bottle before you make economic policy recommendations”…