Watching the drama unfolding in Cyprus over the last few days has been anything if not surreal. The far left and the Eurosceptic right alike have rejoiced at the Cypriot parliament’s “valiant no” to a deal that would have ensured the financing of the cash-strapped economy from the eurozone and the IMF.
The detail they seem to miss is that Cypriots did not reject harsh austerity measures. These measures had already been agreed by the previous – supposedly communist – government of the island, and were approved by the current administration. It did not even revolt against an unjust levy on retail deposits. The eurozone had already signalled its agreement to spare small savers, on condition that assets belonging to foreign oligarchs and tycoons were subjected to a significant haircut (15.6%).
Indeed, it was the Cypriot government that rejected this option, in a dramatic 10-hour meeting of eurozone finance ministers last Friday, because it would damage the sprawling financial sector of the country. So the main demand of this “parliamentary revolt” was that Cyprus remain an offshore haven. In exchange, the Cypriot government seemed willing to offer so many concessions to Moscow as to effectively turn the island into a Russian overseas territory. Why anyone would celebrate this development is not clear.
In Brussels, meanwhile, the people managing the world’s second largest economy showed once again a ridiculous lack of leadership. First, they concluded and defended a deal that would violate the sanctity of retail deposits. When the catastrophic consequences of this were pointed out to them, they started pointing the finger at one another. When they decided to backtrack, it was already too late.
It is true that the deal has so far caused chaos only in Cyprus – a small country that, according to Berlin, is “not systemically important”. But markets and people know already that next time there is a crisis in Italy, Spain or elsewhere, the eurozone is willing to cross the Rubicon. This is a disaster of unimaginable proportions.
All this should not come as a surprise to anyone who follows the Brussels bubble. Suffice to say that the only reason that Jeroen Dijsselbloem was chosen to run the all-powerful Eurogroup (the council of finance ministers of the eurozone), is not his expertise, nor his ministerial experience, but the fact that he is Dutch. All other, more reliable, options were excluded because of their nationality.
So, how could the Cypriot crisis have been resolved? First of all, by allowing a bit more time: there was no reason whatsoever to ask a small nation to deliver almost 30% of its GDP upfront in cash in the space of three days. Such an outrageous request had not previously been made to any bailed-out country – it made a laughing stock of the island’s pro-European government. Second, it was not Cypriot national debt that was unsustainable, but that of the country’s banks. And there was a solution to that: after wiping out shareholders and junior bondholders, and imposing a haircut on senior bondholders, the European stability mechanism could have taken over the Cypriot banks. It could have then gradually shrunk them and put them on a resolution course, while giving Cyprus the time to recalibrate its finance-based economy. This option theoretically exists – it was decided by an EU summit last June – but the legal modalities are not there yet to implement it, because Germany has since changed its mind. Cyprus could, in exchange for this arrangement, securitise future revenues from its gas reserves and offer them as guarantees, together with a strict fiscal consolidation programme.
Two years ago, the European Central Bank could have decided to guarantee all sovereign bonds in the eurozone, like it did with its co-called “outright monetary transactions” programme last September, subject to the implementation of a stabilisation policy by the beneficiary countries. Instead, Greece’s private debt was transferred to European taxpayers, causing animosity between the peoples of Europe. The country essentially defaulted, thus increasing uncertainty across the continent.
One thing is for certain: the eurozone, an aspiring global player, is offering up a Mediterranean outpost of strategic significance as a present to the Russians. It is just up to Moscow to decide whether it will accept it. And the Cypriot no will ridicule pro-European elites in Greece and elsewhere, as it will make it look as if there was an ideal solution that was simply ignored by “Merkel’s puppets”. By the time that people realise that this alternative is far from ideal, it may already be too late.
The question remains as to why all this is happening. Why are northern European countries acting as if they are set on destroying the eurozone, instead of fixing it? I don’t believe in a sinister conspiracy at the heart of all this, but there does seem to be an unthinking, subconscious racism at play – which is just as destructive. The current political discourse implies that all wealth accumulated in northern Europe is the fair reward of a protestant work ethic, while wealth accumulated in the south is a product of corruption (Greece, Italy), tax evasion (Cyprus), or unsustainable business models (Spain). That is why southern European countries are being asked to change their economic models not through a gradual convergence process, but by violent shock.
The inconvenient truth, of course, is that it was not too long ago that Finland was almost bankrupt, and there are still people old enough to remember Germany’s own debt restructuring. “Our finest and blondest friends” (as Blackadder put it) in the north should realise that not all depositors in their own bailed-out banks had paid their taxes. Most importantly, there is not a single academic study that denies that northern Europe has gained at least as much from the euro as the south. If politicians don’t start to communicate this soon, then the eurozone will not only collapse, but the ghosts of the past will come to life.
Nikos Chrysoloras is an EU correspondent for the Greek daily Kathimerini, based in Brussels.