The EU is bullying Cyprus, much as it did Greece. That tactic won't work when the EU and US negotiate more trade deals
What happens in Cyprus doesn't stay in Cyprus. It has implications for the EU, and, to the extent that it reveals how the EU works, it also has implications for the US. That's why the United States should take careful note of the Cyprus fiasco. It's an old Zen saying that how you do anything is how you do everything: that character, in people as in countries, is revealed in every action.
Cyprus very nearly had to grab money from the bank accounts of its citizens to pay for its bailouts. This was the grand plan of EU leaders who certainly should know better than to ask a country to rob its own citizens overnight. Cyprus has not been in good hands, and that bodes badly for future negotiations, including for America, which is going to start tightening its financial ties with the EU this year.
The days leading up to the Cyprus parliament vote were plagued with obnoxious swagger from EU finance ministers, including the overconfident and highly misplaced claim of French finance minister Pierre Moscovici that "there is no plan B." What's worse than a country proposing an overnight bank raid? A country calling off an overnight bank raid because it has no other plan.
Just to keep the record straight, plan A was shot down, and Cyprus is indeed currently looking for its plan B. As a measure of the country's desperate straits, its archbishop has suggested that the Orthodox Church itself could buy the country's bonds and pay off its creditors, which would perhaps be the definition of robbing (Saint) Peter to pay Paul, or perhaps taking the vow of poverty a little too literally.
The upshot is that Cyprus has become a cautionary tale in the European Union's most failed and yet most consistent negotiation policy: bullying.
Cyprus is small and largely unable to fight back, either politically or financially. Its shabby treatment is consistent with how the EU has treated other countries when it perceives it has the upper hand, including Greece and Portugal. In each of those cases, some members of the EU have relied on cultural stereotypes to explain why financial negotiations had to turn against a country. In the case of Greece, leaders including Germany's Angela Merkel painted the country as full of lazy, pension-reliant, sun-worshipping Mediterranean gadabouts to justify the need for austerity. It's not just that it's offensive, it's false: before the crisis raised unemployment rates, you'll find that Greeks, Italians and Spaniards all worked longer far hours than Germans every week. Somehow those inconvenient facts get lost in the economic finger-pointing.
These EU rationales are unflatteringly tribal, and ill befit a monetary union that is supposed to be sophisticated and rational. The German intelligence agency reportedly informed leaders that Cyprus was a haven for money-laundering, which was trotted out as a bizarre reason last week that taking money from Cypriot bank accounts was a perfectly legitimate option. Cyprus's banks have high interest rates on savings, and it is a tax haven, which has attracted "hot money" from Russia and other countries. No one in Europe complained about that when it was helping the Cypriot economy, but now that a bailout is required, the equation has changed.
The character of EU negotiations – sloppy, disaster-prone, often bullying – is important to the US, too. There will be several visible results.
You'll see the cost of the Cyprus debacle, for instance, in the fact that your interest rate on savings will stay exceptionally low. The US Federal Reserve, which sets the core US interest rate, is on alert to protect the American economy against Europe's continued willingness to risk a banking crisis. That will force the US central bank to do more to maintain economic stability here, including keeping interest rates low – perhaps well into 2016, according to some pundits. The Fed will also likely feel pressure to continue its stimulus to the bond markets. If you own savings bonds, which are U.S. Treasury bonds, you'll see the results there, too. Every time Europe has a financial problem, foreign investors flock to buy US Treasury bonds.
One final way that both the US and its citizens will see the impact of the Cyprus debacle is the kind of food you'll see at the supermarket and the cars you'll see on sale. This year, the EU and US will start work on a $613bn free-trade deal that will create closer financial ties over the next two years. This is an important deal. As The Guardian's Ian Traynor reported this month, "the US-EU's trading relationship is valued at €2bn a day, accounting for 30% of global trade, while the US and the EU make up almost half of the world's economic output." The US is a necessary part of this. As the EU points out in its 2012 analysis, its trade account with the US accounts for 14% of overall trade. It's also a growing relationship; the EU-US trade account rose 13% in a single year.
The main point of any trade deal is to work out the tariffs, or taxes, that each side charges on products coming into the country. Currently, there are tariffs on imports and exports that add up to about 3% to 5% on many products crossing the Atlantic, from cars to food. EU leaders, particularly trade commissioner Karel de Gucht, are so eager to have a larger American audience for their products that they have said there's no reason those tariffs can't go straight down to zero.
Gucht has said that he sees the trade deal as a necessary "stimulus" to the struggling European economy, and you can see why European leaders would be eager for the prospect. With more EU economics dipping into recession, at the moment, the EU have a lot more chance to benefit from it than than the US does. This is where wariness should kick in. Europe may be an important trading partner, but it is a subpar negotiating partner in times of crisis, if its kerfuffles with its own members are any measure (and they are). That's why we shouldn't be surprised if the warm-and-fuzzies of a EU-US free trade agreement don't live up to the promises in President Obama's state of the union speech, which vowed the agreement would provide Americans with jobs.
The biggest test for the EU and how it treats the US, for instance, will be agriculture. It is the element of a free-trade agreement that Europe will fight very hard; for instance, as Marcel Fratzcher, the head of think-tank DIW Berlin pointed out in an op-ed in the Financial Times, the US is a great exporter of agricultural products, and Europe depends heavily on its own agricultural economy. Agriculture is one of the few bright spots in the European economy, with "agricultural real income per labour unit," a measure of profitability, rising by 28.5% between 2005 and 2012. At the same time, the price for food production is rising rapidly, and the EU naturally won't want to compete with the US.
In addition, European food and safety regulations are very tight and institutionally opposed to American farming and food production practices: our chicken, washed in chlorine to kill bacteria, would not make the cut in Europe. The use of hormones in American meat production is likely to be another testing point.
These thorny issues are why some predict the EU-US trade deal could take up to two years to negotiate, even though there's already a robust history of trading across the Atlantic. Expect a similar pattern from Europe's own bailout negotiations: delay, and then when that doesn't work, rely on cultural stereotypes, and when that doesn't work, bully some more. Perhaps it can change, but the EU will have to work hard at showing it can build a track record of trustworthiness in its negotiating style.
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