Cyprus and the Failed Placebo

The euro crisis is back. It’s not like Alex or I ever believed that it was gone of course. The news from Alex’s family in Greece was anything but promising, and the numbers seem to speak for themselves. At the same time Europe’s policy-makers seem to have adhered to a new strategy: talk the crisis away. The idea was simple. If we say that the worst part is over, we will restore confidence in the credit-worthiness of the eurozone. That’s how it is with crises in the capitalist system: Keynes showed us that there is inherent instability, that crises are inevitable, but that each crisis will eventually subside. The ‘placebo’-rhetoric that Schäuble and Barroso engaged in seems to have failed though. This crisis will not just subside. In fact, it cannot subside, as long as the disparity in the political economy of the eurozone has not been tackled. In fact, the crisis has caused the different member states to drift further apart. While German unemployment is at a record-low, some areas of the region struggle with 25% unemployment, not to mention the millions of youths who struggle to find work.

Since the weekend, you cannot take out money from
a Cypriot bank

The euro crisis has entered a new phase. Merkel announced a few years back that “your savings are safe” – I guess that is another phrase that has vanished somewhere on the landfills of the crisis. Cypriot savings are no longer safe. Every single costumer of Cypriot banks will be charged at least 6.5% of their savings to save the Cypriot banking sector. Those who have over €100,000 on their bank accounts will lose 10%. Obviously those who are affected by this measure are shocked. A precedent is set for the expropriation of the people. No government has fallen, no revolution has broken out. It is likely that this was merely a first in a number of similar events. Bullion traders, rejoice! The important question is though: is this is good idea, and, perhaps more importantly, is it fair?

I think the answer to both questions in yes. Government policy has rendered saving up money redundant. Inflation rates are higher than interest rates, so if you still have a savings account with a significant amount of money on it, it is perhaps time to get rid of it and invest in a house or some other physical commodity. Low interest rates are intended to boost domestic consumption, because money is made cheaper. At the same time, inflation acts as a hidden tax. I would rather prevent the devaluation of money by means of the Cypriot policy, than to flood the money supply with more or less interest free loans from the ESM.

Nevertheless, I don’t think Cyprus went far enough. Rather than submit to EU/IMF hegemony for the time being, and to surrender its economy to a structural readjustment programme, Cyprus should have covered their entire budget deficit using people’s savings. However, the 6.5/10% rule is overly simplistic, and the percentage should have increased gradually from 1% for €10,000 to 20% for over €200,000. Everyone with savings under €10,000 shouldn’t have had to pay at all. Using this scheme, the €18bn that Cyprus apparently required could have been collected using the domestic money supply. I believe that should this policy have to be repeated, this will be the way to go. If you argue that the government shouldn’t take money from people just like that, perhaps you should consider that this is really just an emergency tax.

Whether or not this policy will work out is another question. If I lived in a country affected by such measures, I would immediately withdraw all my money from my bank account. This is probably what will happen in much of the European south, if it has not already taken place (like in Greece). I don’t know what’s going to happen in the next few weeks, although it seems increasingly apparent that Italy’s problems are far from over. A stable money supply does not solve problems of mass unemployment, corruption, and, most importantly, economic dependency. Germany has done nothing about its low-wage policy, and continues to be the manufacturing engine of the continent. This causes money to flow into Germany, and out of the south. Without a solidarity mechanism in place, problems can only worsen.

Harald Köpping