Treating Cyprus as the Eurozone’s lab rat

Every negative European political trend has deepened in the latest round of the Eurozone crisis, as Cyprus has been treated by the EU with a disdain for self-determination worthy of the high age of imperialism. It is this which is really troubling, not the haircuts for depositors or the bank closures. In effect, an entire island nation has been made a laboratory rat for a new Eurozone experiment in rebalancing economies in the EU single currency – whether the Cypriots like it or not. 

Cyprus is the perfect fall guy for the EU and IMF experts who, despite the mess in Greece and elsewhere in southern Europe, still believe they know best how to run a nation’s affairs. That’s because, as well as being too small to count, especially for the markets, Cyprus is easily painted as a bad guy, a swarthy, even Levantine crook which launders dirty Russian money (nearly a third of Cypriot bank deposits) for ‘dodgy’ oligarchs. This whiff of corruption (nothing new to Cyprus, or other European banks for that matter) provides the perfect pretext for treating Cyprus as a case apart. This is meant to soothe the fears of senior northern European debt holders – it is corrupt Cyprus, and not failed private risk in general, that has been targeted. 

So, because it is small, and in the eyes of the Eurozone social engineers, easily contained, Cyprus has been selected to be an experiment, potentially a model for Portugal or Spain. And if it all goes horribly wrong… well, Cyprus is small and a dodgy special case, so who cares? The EU doesn’t. 

As a result, Cyprus is to become the test dummy for a new Eurozone rule that no country’s financial sector should be bigger than the EU’s average of 3.5 times the size of annual GDP. As with other Eurozone axioms, the new target is entirely arbitrary (it’s based on an average of 27 countries with economies as different as apples and pears) with a bias towards the larger and wealthier nations of the EU.

It ought to be obvious that uniformly distributing the financial sector over the geographic area of the Eurozone is absurd. Financial specialisation and concentration is part of geography and the division of labour in capitalism, especially for an island in Cyprus’s part of the world. Just look at Luxembourg, Switzerland, or the City of London.

The financial sector is certainly big in Cyprus. Until recent events unfolded, the total consolidated assets of the Cypriot banking sector were 7.5 times the size of the island’s economy, which produces about £15 billion a year. Its relatively huge financial sector was dominated by three large banks; the second biggest, Laiki, has been shut down, and the Bank of Cyprus, the largest lender, is to have losses of between 40 to 50 per cent imposed on it. 

As the condition for a Eurozone/IMF bailout of €10 billion, Cyprus must more than halve the size of its banking sector by 2018, in order to match the EU average, the new ‘golden rule’ of a balanced economy. Notwithstanding the slurs and aspersions cast on Cypriot bankers and their Russian friends, the size of Cyprus’s banking sector is a very new concern. When Cyprus was getting ready to join the EU in 2003, a European Commission report found no problems with its banking sector. Neither did the European Central Bank (ECB) when it assessed Cyprus’s suitability for Eurozone membership in 2007.

Ironically, when Cyprus joined the Euro in January 2008, with the storm clouds of the financial crisis gathering on the horizon, the ECB actually promised it that the Euro would protect its banks. ‘For a small, open economy like Cyprus, Euro adoption provides protection from international financial turmoil, which often has a disproportionate impact on smaller economies’, said Jean Claude Trichet, head of the ECB at the time.

It was not until last year that an EU report first publicly mentioned the threat that Cypriot banks might pose to the financial stability of the island. This happened not because of Russian dirty money, but because of the deadly currency that the Euro has become for some of its members.

Last year, Cypriot banks suffered heavy losses when the Eurozone forced a restructuring of Greek sovereign debt, wiping around €4.5 billion off balance sheets, a sum equivalent to 26 per cent of the island’s GDP. In a very real sense (rather than in the overblown slanders about Russia), the Cyprus crisis is a product of the mistakes made in Greece by the Eurozone and the IMF.

While the EU and IMF have been brutally precise about how Cyprus is going to be reengineered, their bureaucratic love of statistics and figures is far vaguer when it comes to the actual impact of the policy on Cyprus. So, during a typically smug press conference on Monday to inform us that EU experts would be on hand to help Cyprus deal with the consequences of the restructuring, I asked José Manuel Barroso, the European Commission president, whether, given the precise Eurozone/IMF rebalancing target, accurate to 0.5 of a per cent, he could tell what the impact would be. ‘In these exceptional, extremely difficult circumstances that Cyprus is living in, it is impossible to make any kind forecast, including macro-economic, in medium to long term’, he replied. ‘It is very uncertain.’

One thing is certain, though: as in Greece, the living standards and the democratic rights of the Cypriots will not be allowed to stand in the way of the prescriptions of Eurozone and IMF officials.

According to a Société Générale research note, Cypriot GDP is forecast to  drop by ‘just over 20 per cent in real GDP by 2017’. But this grim, Greek-style contraction does ‘not account for the additional uncertainty shock generated by the past week’s appalling political mess’, the note added.

The chaotic first agreement was drawn up by the Eurozone and IMF on 16 March with a plan to restructure Cypriot banks, which taxed depositors with deposits under €100,000 in flagrant breach of the spirit of EU law. Amid public outcry and market turmoil, this agreement was shot down within 24 hours, as Germany, France and the EC disavowed it before the Cyprus parliament rejected it.
 
As the deal fell apart, an ‘appalling political mess’ created by the Eurozone further crippled Cyprus’s financial sector. At the time of writing, banks still remain closed and capital controls, expected to linger into the summer, are being drawn up, including a personal weekly cash allowance or ration for every Cypriot.

The Cyprus crisis was made in the Eurozone. It was then made worse by the bullying and threats which have become such a feature of Eurozone politics. Such imperial heavy-handedness no longer shocks observers, as many, including in the liberal New Yorker, now argue that the end justifies the means. ‘The EU and Germany are right to bully Cyprus’, opined John Cassidy. ‘In this story of David and Goliath… there is a twist. To a large extent, Goliath is in the right.’

Alongside the flagrant disregard for Cypriots, who must be bullied into doing the right thing as defined by others, anti-German hysteria has also made a reappearance. Jean Claude Juncker, prime minister of Luxembourg, kicked it off by warning that a new European war could be on the horizon. He told Der Spiegel on 10 March: ‘Anyone who believes that the eternal question of war and peace in Europe is no longer there risks being deeply mistaken. The demons have not gone away — they’re only sleeping, as the wars in Bosnia and Kosovo showed. I am chilled by the realisation of how similar circumstances in Europe in 2013 are to those of 100 years ago.’

At the time of making the comments, Juncker was (quite rightly) fighting against the absurd new EU diktat that the size of a national financial sector should reflect the average – Luxembourg’s is worth 24 times its GDP. By mentioning war, he was putting political pressure on Germany, which is a supporter of the new rule.

The war fantasy took off. ‘Could Germany spark another war? I fear it’s all too possible’, wailed Dominic Sandbrook in the Daily Mail. Not to be outdone, the persistently and shamefully anti-German New Statesman featured a cover placing Merkel alongside Hitler and Bismark: ‘The German Problem: Why Europe will always fear Berlin’, ran the headline.

When it comes to Cyprus, Germany has been throwing its weight around, as have other countries. But Berlin has not dominated proceedings, despite Germany’s position as the most economically powerful EU member state. Rather, the Eurozone’s onslaught has been so brutal and one-sided because of the consensus among EU elites, not because Germany has laid down the law.

The game-changer was the threat by the ECB to withdraw assistance to Cypriot banks overnight, a sanction that would have prompted the immediate, uncontrolled collapse of banks and a devastating crash for the Cypriot economy. The decision to threaten to turn off Cyprus’s ’emergency liquidity assistance’ was taken by the bank’s governing council, by a two-thirds majority. To repeat: that was a two-thirds majority of the ECB’s central bank, not a German diktat. It was the EU, ever punctilious in its procedures, which decided to threaten Cyprus with the nuclear option, not Germany alone. 

As I have written previously on spiked , the absurd targets enshrined in the EU treaties currently being used to devastate southern Europe are the product of an institution designed to stand above national interests, especially and specifically to contain Germany, where voters are regarded as particularly dangerous. Anti-German hysteria merely legtimises the EU’s role as an all-powerful constraint on the most powerful country in Europe. As Cyprus shows, it is the EU that is the danger, not Germany.

However, that is not to say that Germany, or its odious finance minister Wolfgang Schaeuble, has not behaved badly in the current crisis. Last week, Edward Scicluna, the Maltese finance minister, wrote an article illustrating how obnoxiously Schaeuble had behaved at a recent meeting. Still, though, Scicluna was dispassionate enough to see that it was the EU that was the threat, not Germany: ‘[The meeting provided a] case study of how an EU micro-Mediterranean island member state can expect to be treated if ever its unfortunate turn would come to seek aid from its fellow member states’, he noted.

Europe’s elites, including Germany, are imbued with a profound defeatism. Saturated with a profound mistrust of their own peoples, these elites have fashioned the EU into powerful vehicle for their common political culture: a commingling of ‘there is no alternative’ dogma, a fear of national interests, and a belief that politics is the management of the inevitable.

It takes Paul Krugman, an American economist, to remind Europeans that there is always another way. ‘Cyprus should leave the Euro. Now’, he writes. Yet in today’s Europe, even the prospect of economic annihilation is not enough for the Cypriot elite (or any other) to rebel against the Eurozone juggernaut. Cyprus looks set on becoming another sacrifice on the altar of the ideology that nations and peoples cannot and should not determine their own affairs. 

Bruno Waterfield is Brussels correspondent for the Daily Telegraph and author of E-Who? Politics Behind Closed Doors, published by the Manifesto Club.