The latest proposal of the Eurogroup, regarding the bail out of Cyprus has caused unprecedented unrest that has not been limited at the national or even the European level. The essence of the proposal is for Cyprus to contribute a third of the overall financial assistance required via a haircut in depositors’ money, including even the average account holder whose deposits do not exceed 100,000 euros (i.e. deposits otherwise fully guaranteed). In the last Eurogroup meeting, German finance minister with the backing of his northern allies and with the blessing of countries possibly envying Cyprus’s success as an international financial centre, cold-bloodedly blackmailed Cypriot officials with a ‘take or leave it’ deal. Cyprus had to accept the principle of haircutting deposits (a red line for Cypriot negotiators, even considered to be a ‘stupid idea’ by the Finance Minister) otherwise the island’s second largest commercial bank would be instantly refused further emergency liquidity assistance and essentially be left to collapse, possibly taking down with it the whole economy.
The proposal of the Eurogroup resembles greatly the infamous ‘golden rule’, i.e. the one who has the gold makes the rules. Germany, being the leading economic power in the EU, with the support of other northern European countries that aspire to its successful export-led economic growth model, has been the country effectively setting the guidelines for EU members in need of financial assistance. Far from the European ideals which respect and promote solidarity among the European people, Germany has stubbornly refused any attempt to acknowledge the particularities of the economic growth models of those countries in need and has instead tried to enforce its own policy remedies in a ‘one-size fits all’ manner, without foreseeing the likely dramatic consequences of such action. Ironically, Germany has benefited greatly by sharing a common currency with these countries which has enhanced trading and allowed the country to accumulate an astonishing trade surplus.
Specifically for the case of Cyprus, it has been evident that Germany, led by its uninspiring political elite (Angela Merkel and Wolfgang Schaueble), has eyed Cyprus’s economic growth model and, deliberately or not, has initiated a process of bringing it to a halt. The knock-on effects from this matchless decision targeting bank depositors cannot be calculated precisely. What many fear is that such decisions may fuel a vicious circle of economic recession from which Cyprus cannot – and will not – escape easily. Even more, fears of creating a precedent and a possible repeat of such action in other suffering South European states has further exacerbated panic, unrest and uncertainty, which essentially put at risk growth prospects in these countries as well. Germany has once again been short-sighted in proposing solutions that do not consider if and how a country’s economic growth model can adjust, but which instead simply aim at getting the math correct.
Undoubtedly, those states in need of financial aid have to take painful measures of the past and adjust accordingly their growth models taking into consideration errors and inefficient practices that urgently needed reform. Yet one needs to place the measures proposed within the right context weighing, on the one hand, the fact that the rescue aid is based on European tax payers’ money that cannot be spent light-heartedly and, on the other, the need not to eliminate any future growth potential for the recipient country. Germany, being the leading power and contributing the most to the ESM, certainly should have a strong say in the rescue packages discussed but it cannot exclusively and unilaterally determine the fate of the European people within a narrow-minded context, since this has up to now had a boomerang effect and has failed to rescue the states in need.
By becoming a member of the EU, any state foresees a Europeanisation process that will have multifaceted benign effects for the economy and society on the whole. What we are experiencing now is instead a process of Germanisation that, in my opinion, can by no means be the answer to the problem. It is in such times that it is more evident than ever that the EU lacks charismatic leadership that could unite Europe in its struggle out of the crisis.
Note: This article gives the views of the author, not the position of Greece@LSE, the Hellenic Observatory or the London School of Economics.
Dear Mr/Dr Pegasiou, the so-called Cypriot “economic model” has failed, which is why you are demanding the eurozone lend Cyprus 17 bn euros. If the Cypriot economy is so great and so vibrant how comes you are so desperate to be lent billions?
It’s astonishing that nowhere in this article does Mr/Dr Pegasiou even acknowledge that Cyprus is having financial difficulties. And this narrow-minded nonsense about Germany “envying” Cyprus’ so-called “success as an international financial centre” is astonishing and illustrative of the mentality that has brought Cyprus to the brink.
Cyprus’s so-called “success as an international financial centre” is a joke. Cyprus is not a success as an international financial centre, it is a bankrupt wannabe financial centre that has tried to build itself up by using the most risky means. The over-heavy reliance on Russian deposits of questionable origin may have let you think the country was some kind of economic success, but the stupid “business model” followed by Cypriot banks is now showing its true results. Can you actually name any internationally respected multinational companies based in Cyprus, because they were attracted by its “economic model”? Exactly who are these deposit holders, what are these shell companies that have been opened in Cyprus? Why have Cypriot governments refused an independent audit of Cypriot banks to check the extent of black money that is running through them?
The thing is, Cyprus should never have been allowed into the eurozone in the first place. There is also the question of whether Cyprus should have been allowed into the EU, which many countries felt uncomfortable with at the time but Greece threatened to veto the entry of the Central and East European countries. Secure in this knowledge, the then Cypriot leadership did all it could to destroy the chance of a settlement to the Cyprus issue. So, the EU has that mess to put up with as regards Cyprus, as well as this financial mess.
And, don’t forget the facts – France was also adamantly against lending Cyprus any more than 10 bn. Can you name any country who said “let’s lend Cyprus 17 bn?” Do you actually have any allies in your campaign against the alleged “Germanisation” of Europe? Does any other eurozone or EU member-state share the Cypriot definition of “Europeanisation”? Do you truly believe Ireland, Portugal, Italy, Spain support anything Cyprus is saying?
Even Greece is only giving lip service “support” (“we stand by you” but not “sticking up for you” and certainly no “backing up your arguments and voting with you”).
This excellent article ends with the observation that “It is in such times that it is more evident than ever that the EU lacks charismatic leadership that could unite Europe in its struggle out of the crisis.”
Before any charismatic leader can unite the people of Europe in their struggle out of the crisis, it is first necessary to find a leader who actually understands what caused the crisis in the first place. Such people, let alone leaders, are few and far between, unfortunately.
I encourage readers to visit the website http://www.positivemoney.org and learn what caused the crisis, and consider the proposed solution.
The cause of the crisis is the fact that Europe’s money system is debt-based, as is the money system of every country in the world. Approximately 97% of the euros in circulation exist only electronically and change hands using EFTPOS and other electronic means. They all came into existence by being created out of thin air by private-sector banks and lent into existence at interest.
Positive Money proposes changes to the law that would prevent banks from creating new money, period. All new money would be created debt-free and interest free out of thin air by the central bank, which must of necessity be owned by central government, under the instructions of a Monetary Creation Committee that is totally independent of control by politicians and businesses alike, at a rate just sufficient to keep up with economic growth, to ensure that inflation has a long-term average of zero. This new money would be given to member country governments pro rata to the size of their economies, for them each to spend into circulation according to their individual democratic mandates. All commercial banks would have to become mere money brokers, brokering existing money between savers and borrowers, which is what they presently maintain to be what they do now. This is untrue, for every time a bank makes a loan it creates the money out of thin air. The corollary is that every time a loan is repaid, the money disappears back into the nothing from whence it came. This of course leads to asset price bubbles, which crash from time to time, the last time being in 2008. When a crash comes, people and businesses get scared and start paying back loans faster than they are being taken out. This of course means that there is then less money in circulation, and voila – there is a recession, or even a depression, and governments cannot balance their budgets. As we have seen, austerity does not work.
One very viable solution is that proposed by Positive Money, where governments take the power to create new money back from the banks and holds and exercises this power itself, on behalf of the people. It is in no way communism. Rather, it is people’s capitalism, which has to be better than the crony capitalism we have now.
The power to create money was never given to the banks – they simply began to do it, many years ago. Only the people, when they exert their democratic rights, can take this enormous power back from the banks and have it exercised to benefit themselves, through their governments, rather than leaving this power as an enormous benefit to the banks.