As if there weren’t enough slightly-but-not-very informed comments out there… here are my €0.02 on the Cyprus bail-in, as seen from a ‘pro’-EU perspective.
1. On a personal level, I’m horrified by the proposal to strip ordinary savers of their money to bail out the banks. I completely understand the anger of people who feel it’s daylight bank robbery. I would go mental if it happened to me!
2. As I understand it, Cyprus’ problem has arisen because its government pursued a deliberate policy of using its euro membership to increase its attractiveness to offshore investors, including those of a, well, less savoury character. In so doing, its banking sector badly overstretched itself. There are clear parallels with Iceland in 2008.
3. So I’m not remotely surprised that taxpayers in the richer eurozone countries balk at bailing out Cypriot banks. They will naturally be asking themselves why they should be paying to save the skins of wealthy Russians.
4. So I’m also not surprised that eurozone ministers insisted on a massive haircut from the Cypriot government. Politically, they had little choice but to insist on this bitter ‘sweetener’ for their voters and taxpayers.
5. I’m guessing that eurozone ministers felt that they could not tell Cyprus how to conduct its haircut; that would be meddling. But I really wish they had. Leaving the Cypriot government room to impose part of the burden on ordinary depositors was a monumental political blunder which will feature in future text books.
6. Let’s be clear: according to the reports I’ve read, the choice to impose a levy on small deposit holders was a CYPRIOT one, not a Eurozone one. The Eurozone said “haircut equal to one-third of the bailout” – and I guess they assumed, or hoped, it would be targetted on the big offshore depositors.
7. But the Cypriot government chose to spread the shock and hit small deposit holders too. Why?? I guess they couldn’t face the prospect of imposing more than 10% on offshore investors (i.e. the Russians). We can speculate as to why that is, but I can’t think of many reasons that don’t leave a very nasty taste in the mouth.
8. But wouldn’t the Cypriot people rebel against such a cruel decision by their government? I’m guessing the Cypriot government calculated that they could choose to hit small investors and blame Brussels/Berlin for it, even though it wasn’t Brussels or Berlin that did it. The Cypriot government comes away looking like the victim, not the villain.
9. This is a disaster for the EU, any way you look at it. Brussels and the EU Institutions are not to blame; Eurozone ministers are the ones who took the decision to impose a haircut, apparently against the advice of Brussels; and the Cypriot government chose in turn to target small investors. But there is no way that the EU can escape the resulting PR shit-storm. How do we avoid the impression that poor southerners have been stitched up like kippers by Brussels?
10. This is a really horrible situation – especially for my fellow European citizens in Cyprus, in the short term, but for all of us in the long term, I fear. It will be a huge shot in the arm to eurosceptics everywhere. This is unfair, because I think this is a case of poor policy, poor political judgement, and poor institutional architecture, rather than a clear argument against European government or even against a single currency. I still believe there’s an overwhelming case for governance at the European level. But my faith in the existing Treaty architecture – not exactly strong to begin with – has taken another hard knock.
(DISCLAIMER: I post as a private citizen with some inside knowledge of the workings of the EU but no specialist knowledge of eurozone matters.)
edit – I’m told that the FT is now reporting that it was the Commission that first floated the proposal to target small depositors. If that’s true, then that seriously undermines my defence of the EU institutions (as opposed to the eurozone ministers and the Cypriot government) but it reinforces my final point in para 10.
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