Euro authorities seem to be using Cyprus to demonstrate a newly pig-headed toughness. Harder times could follow
It is only half an island, but what is going on in Cyprus could yet shake a continent.
The eye-catching twists in the tale of President Nicos Anastasiades's proposed raid on Cypriot savers are specific: a banking sector seven times bigger than the lopsided microeconomy that hosts it; threats from the Kremlin as Russian investors get off lightly; talk of Gazprom bailing out the busted banks today in return for command of the island's natural resources later. None of this is particularly pertinent to the wider eurozone, which – for all its problems – is almost nowhere as dependent on footloose foreign flows of hot money. Such differences are important, but they have blinded Brussels, Frankfurt and Berlin – who pushed for the deal – to similarities that matter more.
Like much of southern Europe, Cyprus has two linked crises, of bank and sovereign solvency. Like the eurozone as a whole, it operates within a single currency, which precludes the options of devaluation and inflation that, for all their dangers, have provided the most reliable means of muddling through previous debt crises. And, like the wider European Union, Cyprus is up against an austerity-aggravated slump – a slump in which citizens enjoy precious few certainties. One rare exception was Europe's pledge to guarantee deposit accounts up to €100,000 (£86,000), a promise that was supposed to make cash in the bank as good as money under the mattress, but a promise that is now tainted everywhere by Nicosia's plan to swipe 7% from even modest nest eggs.
Inflation has frequently rendered fiduciary currency's "promise to pay the bearer" pledge rather hollow, but the psychology of snatching funds outright is different. If you doubt it, just compare the near impossibility of actually cutting money wages with the ease of letting them sink relative to a rising cost of living, something so doable that it is being ubiquitously done across Britain and Europe right now. Where wages are at issue, politicians urging restraint can rally a pro-austerity constituency of savers on fixed incomes against angry unions. But when – as in Cyprus – austerity is biting directly on the savers, it is hard to see where any support is going to come from. That matters, since it is not too grand to describe Europe's crisis as a crisis of democracy.
A year ago the euro crisis was moved off the boil by two interdependent promises to "do whatever it takes" – one from the European central bank, which pledged to print cash as required, and the other from southern leaders, such as Mario Monti, who vowed to wear the hairshirt for as long as it took. After the voters of Italy showed Mr Monti the door, the single currency's authorities would seem to be using Cyprus to demonstrate a newly pig-headed toughness. If they persist there could soon be much tougher times everywhere.
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