This is yet another euro bailout that punishes ordinary people to prop up a bust financial system. How long can the euro last now?
You don't need any economics to grasp what Europe and the IMF have just done to the Cypriots. Anybody can imagine how awful it would be to wake up one morning and discover that their savings have just been raided. Over the previous four "rescues" of bust eurozone countries, the details have always been swaddled in technicalities: debt restructuring this, fiscal consolidation that. With Cyprus, however, an immediate tax of up to 10% on savings accounts needs little explaining. Officials may euphemise it as a bail-in but everyone else will agree with yesterday's Daily Mail headline: it's a bank robbery.
Pensioners are losing part of their retirement savings in order to keep afloat the island's two big banks. According to the plan announced this weekend (details are reportedly being rejigged so as to win parliamentary support), poorer Cypriots will be hit with a 6.75% tax on assets so as to cushion the blow on the rich, who will have to cough up 9.9%. Up until last Friday, bank deposits up to €100,000 were officially protected. Come what may, a retiree with a nest-egg of €50,000 would not have lost a cent. She is now €3,375 poorer; her only compensation will be shares in a bust bank.
Inevitably, assurances come in that this is strictly a one-off levy. But they are being made by a Cyprus finance minister who just a few days ago waved off any compulsory requisition with "there really couldn't be a more stupid idea". Whenever the island's banks reopen, his public can hardly be blamed for pulling out the rest of their savings.
Occasionally, financial reporters face brickbats for stories that may trigger a bank run; but this is the first time I have seen a policy that could almost be designed to spark one.
There are winners, of course. They number the hedge funds of Mayfair that bought Cyprus government debt betting that the euro elite would implement just such a stupid scheme. They include the dirty-money merchants who launder their cash through the tiny tax haven; under the old scheme, someone with €1m in a broken bank would have lost €900,000 – they now walk away only €99,000 worse off. The Cyprus banking system which, at about eight times the size of its GDP badly needs to be shrunk, will be propped up and go unreformed.
All that said, there will be the usual sermons from the rest of Europe about how the latest car crash is really the exception rather than the rule. Already yesterday, the bankers of Lisbon were uttering the formula that "Portugal is not Cyprus". And just as northern European politicians were happy to smear the workshy Greeks, so you will surely hear the claim that Cyprus – the Cayman of Europe – was always less an economy, and more a financial washing machine. What you won't get is any explanation for why Cyprus was accepted into the euro just five years ago, why Brussels never tried to clean up the island's financial system, or what it will do about the latest hot-money destination of Latvia.
After all we've seen in the past couple of years, it surely comes as no surprise to see yet another euro bailout that punishes ordinary people in order to reflate a broken financial system. Nor is this the first time that unelected officials in Brussels and the IMF have drawn up a programme for political suicide and handed it to a democratically elected government of a small, weak country with the ultimatum to take it or leave it.
What's different this time is the nakedness of the Cyprus heist. The right can jump up and down at a massive infringement of property rights. The left can fulminate at the obvious social unjustness of such a tax, levied even while the banks are shut. However the Brussels elite might thus seek to defend their plan, they have managed to offend all sides – and so blown a huge hole in the credibility of the eurozone. As Talleyrand once scornfully remarked of the latest blunder by Napoleon Bonaparte: "It's worse than a crime; it's a mistake."
That will be the lasting lesson from this week: it shows up again just how far the single currency has drifted from all those warm words uttered in the 90s about creating a continental shelter from turbulent globalisation. As we have seen since the sovereign debt crisis began, the euroclub has bullied its poorer members into swallowing poisonous austerity and social regressiveness in order to keep a bust system on the road. In so doing they have created the conditions for such clowns like Beppe Grillo and thugs such as Golden Dawn.
A friend of mine has a mid-level job at the European Commission. Over the past few years, through Greece and Ireland and Portugal and Spain, he has kept up a resolutely chipper air. This weekend, as details of the Cyprus deal came out, he sent me this email: "Is this what the European financial system has come down to? A direct appropriation of savings because it cannot cure its systemic problems. It is not just the banks that are bankrupt. It is the whole bloody model that has run its course and we are in denial."
If even the true believers in the euro, the ones who have built their careers on it, now express such fundamental scepticism, you have to wonder how long it will last – or in what form.
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