In case anyone thought that the bank and sovereign debt crisis that has engulfed certain parts of the eurozone has produced all its dramatic twists, events this weekend came as a rude awakener.
Eurozone leaders agreed early on Saturday morning a deal to bailout and restructure the Cypriot banking sector.
The most controversial part of the deal sees a tax levied on depositors to raise about 5.8 billion euros, to add to the €10 billion committed by the Eurozone and (probably) IMF. A 9.9% levy will be imposed to deposits over 100.000, while deposits below 100.000 will face a levy of 6.75%.
So for the first time depositors, who were considered sacrosanct until now, are forced to share the cost of a bail-out.
A lot has been said about how this decision was reached. The blame shifts depending who one talks to, but the Financial Times give a good account. It seems that considerations about the future of Cyprus as an off-shore financial centre played a role when deciding how widely to spread the pain among depositors in Cypriot banks. It was feared that taxing only non-resident depositors would scare investors away.
So the main bone of contention (in an overall contentious decision) is that smaller depositors are put on the firing line, in a move that is seen as unfair and dangerous. Asking working people and pensioners to sacrifice their savings in the service of a failed banking sector is indeed cruel. But WSJ’s Simon Dixon makes a fair point, there is an element of fairness when asking locals to contribute to the bail out of their country’s banking sector, especially when that sector represents such a huge part of the country’s economy.
Many argue that it should not have come to this at all, that depositors should have been spared all together. But as Hugo Dixon of the Reuters argues the Eurozone and the Cypriot government had very little choice. Imposing a haircut on government debt, like it was done in Greece’s case, was not possible because most of the country’s sovereign debt is held under English law (making a Greek-style restructuring hard) and the remaining is held by Cypriot banks, making a hair-cut self-defeating.
Hence the decision to impose a tax on depositors, many of whom are non-resident, predominately Russian and in many cases suspect of money-laundering. It would have been a hard task politically to explain to taxpayers across the Eurozone why they should contribute more to a bail-out that would have, to some extent, helped Russian oligarchs.
The most important thing that one should consider is what would be the cost of an alternative. In the absence of a bail-out deal (one that the Cypriot government had delayed long enough) Cypriot banks (which are already under ECB life-support) would collapse, taking the Cypriot economy with them. Lest we forget that the banking sector in Cyprus is more than 5 times the Cypriot economy.
The one good thing that can come out of this is the de facto reduction of Cyprus’ banking sector to a size closer to the EU average, as the Eurogroup statement, that followed the bailout agreement, calls for. As we have seen in other European countries like Ireland and the UK, an oversized financial sector holds huge risks for the host country, especially for one whose economy is as small as that of Cyprus. To a large extent this is a banking crisis, rather than a “euro-crisis” and no matter what the structural inefficiencies of Eurozone’s governance (and European politicians inability so far to separate bank from sovereign debt) what Cyprus is faced with is the collapse of a banking sector that grew too big for its own good and made far too many bad decisions.
There is still a lot to play for, not least a parliamentary vote to approve the bail-out deal. Until then there is time and room to reconsider how the burden will be spread among depositors, and there are many proposals on the table on how to shield small depositors and reduce their contribution to the bail-out pot of money. Some reports talk about reducing to 3% the levy imposed to deposits up to €100.000.
One last thing. The situation in Cyprus shows that in an interconnected world we are not immune to what happens “over there”. Capital as well as people are mobile, the banking sector interconnected and as a result banks and people’s savings are affected, irrespectively whether we are part of the Eurozone or not. The fact that British citizens who live and hold deposits in Cyprus will have to be part of the bail-out levy shows how important it is for the British government to be as involved as possible in Eurozone governance and EU-wide efforts to address the systemic faults of Europe’s financial sector.
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About: European Movement UK
The origins of the European Movement
The origins of the European Movement lie in the aftermath of the Second World War. More than eight hundred delegates from across Europe gathered in The Hague in May 1948, under the chairmanship of Sir Winston Churchill, to create a new international movement to unite Europe and prevent further wars between its members. The British section of the European Movement was founded a year later.
In the 1950s and 1960s, the European Movement put forward the arguments for joining the European Economic Community, and it ran a major campaign in the early 1970s, both among the general public and in parliament, to win the battle for entry. In 1975, during the referendum on membership, the European Movement played a central role in the YES campaign. Other campaigns since then have included pressing for direct elections to the European Parliament in the 1970s and promoting the benefits of the single market in the run-up to 1992.
During the 1990s, the organisation became revitalised around the need to create a new national pro-European coalition. The rise in anti-European feeling threatens to undermine Britain's place in the European Union; our exclusion from the first wave of countries joining the euro is an example of how we lose out when the pro-European case is not put strongly enough in public.
Aims and activities
The European Movement is
- A rallying point: The European Movement rallies all those who believe that European unity is vital where the peoples of Europe have interests in common such as increased trade to improve economic prosperity, an improved environment to tackle climate change, and action to combat global poverty. A politically united Europe is needed to sweep aside the petty tribalism that has historically, at the very least, been an obstacle to progress or, at its worst, has led to bitter conflict and a catastrophic loss of human life. Europe must be united as a region of law, justice and democracy, equipped with the institutions capable of achieving these ends. Members receive a regular newsletter, euromove, with information and news about Pro-European developments. In addition, the office publishes updates on campaign ideas and issues an e-mail newsletter, e-News. Members take part in lively discussions in person and online, and the European Movement maintains an informative website.
- A campaign: The Movement has since its creation in 1948 sought to build and maintain public support for the unity of Europe. In the face of a backward-looking nationalist resurgence in some quarters, this role is as vital as ever. The campaigns include public information points, working with the media, and lobbying MPs and other decision-makers. In addition to the work of the London office, the branches and national councils organise campaign activities in their own areas, as well as political discussions and social events for members.
- A pressure group: The creation of the European Union has been an extraordinary achievement - democratic, sovereign states have created a common institutional framework in order to forge a future together based on the rule of law. But the European Movement is not the Union's information service or an apologist for its weaknesses. It must work to win support for the reforms necessary to improve its ability to meet the hopes and aspirations of its peoples.