Cyprus Bailout: Europe´s Love just got even Tougher

26.03.13 Publication:

Once again
the euro has been saved, but the eurozone continues to stumble towards
disaster. The distinction matters, even if European finance ministers emerged
from their late-night negotiations talking proudly of having kept Cyprus inside
the euro and—though they didn’t say this explicitly of course—of having stiffed
Russian fat-cats. For while southern European debtors are the problem for the
euro, it is northern European creditors who are the problem for the eurozone.

technical terms, the ministers have reason to be pleased. With the Cyprus deal,
they have achieved two big things. They have proved that member countries will
do almost anything to stay inside the single currency, rather than suffer the
ignominy and economic cardiac arrest that an exit would bring. If neither
Greece nor Cyprus would leave, then no one will, short of revolution.

they showed that the German-led emphasis on running the euro through tough love
still works. And toughness is right, when faced with banking crises, which is
what Cyprus’s troubles amounted to: ever since the great Walter Bagehot coined
the phrase “lender of last resort” in the 1860s, it has been evident that
financial rescues must be mixed with punishment.

2008-09, amid the panic after the Lehman collapse, there was too little
punishment of the bankers, shareholders and creditors who had let their
institutions take reckless risks, for rescuing the financial system took
priority. The same was true during the European bail-outs for Ireland and
Spain. The Cyprus deal improves on that, and sets a helpful new precedent

 Those who
deposited large sums in Cypriot banks were not just tax-evaders in their home
countries, though often they were that; they were also lenders to these banks
who enabled them to act recklessly in Greece and elsewhere. A bank deposit is the
same as a loan. So making depositors of 100,000 euros and up pay for part of
the rescue is just the same as defaulting on debt. The Russians have called
this “stealing”, but if so then Russia too stole money when it defaulted on its
debts in 1998.

The Cypriot deal is a sensible reinforcement of tough love.
The real problem with it, at least as a focus of eurozone policy and politics, or
as a cause of back-slapping satisfaction, is that it misses the bigger point. It
is all about tough, and not at all about love. For the love part is what the
eurozone now needs to focus on. Not for Cyprus, specifically, but for the whole
of the single-currency area.

currency can be saved, rather as in the 1920s the Gold Standard was preserved,
but it is the countries that really matter. If the eurozone economies go on spiralling
downwards in recession their politics are going to turn
nastier and nastier. The 25% vote in Italy’s February 25th
for the anti-establishment Five Star Movement led by the former comedian, Beppe
Grillo, is a foretaste. And Italy may well have a second election in the next
few months, in which the rebellion against austerity, the euro and above all
Germany is likely to intensify.

crises in countries such as Greece, Cyprus and Spain do pose genuine dangers.
But a never-ending recession, with youth unemployment at 36% in Italy and over
50% in Spain, poses much bigger dangers still. And the tragedy is that it is
avoidable—if only Germany and the other Northern Europeans would drop their
insistence on fiscal austerity for all and in every circumstance.

week the International Monetary Fund advised the Netherlands that it really did
not need to keep on cutting its budget deficit. It was good advice, and the
same applies to Germany. They should be stimulating demand, not repressing it
in a fit of sado-masochism.

The hope has to be that German policy will change once the
federal elections are safely out of the way in September. Yet by then, Italy,
the zone’s biggest sovereign debtor and its third-largest economy, might have
elected a vehemently anti-German government, led either by Mr Grillo or by the
man he calls “the psycho dwarf”, Silvio Berlusconi. If the prospect of that
doesn’t make the northern Europeans see sense, then nothing will.