Münchau views the tax/confiscation of a portion of Cypriot savings accounts as a "finanzpolitischen Attentats auf die zyprischen Sparkonten" ("financial-political assassination attempt on on Cypriot savings accounts") orchestrated by German Chancellor Angela "Frau Fritz" Merkel and her Finance Minister Wolfgang Schäuble. He quotes with approval Spanish econmist José Carlos Diaz, who writes in Una aberración económica El País 17.03.2013, "Tres años después de la tragedia griega que supuso el inicio de la crisis del euro, el rescate a Chipre confirma que no hay indicios de vida inteligente en Europa." ("Three years after the Greek tragedy which is supposed to have initiated the euro crisis, the rescue of Cyprus confirms that there are no indications of intelligent life in Europe.")
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| Angela Merkel's policy toward her European "partners" |
Münchau sees in the Cyprus problem a strong confirmation that a currency union to be workable has to include a banking union with strong official regulation and oversight. Krugman has been blogging about the Cyprus situation, and he explains, "Cyprus is a money haven, especially for the assets of Russian beeznessmen; this means that it has a hugely oversized banking sector (think Iceland)." (The Cypriot Haircut 03/17/2013) And he writes that, as in Iceland and Ireland, "runaway banking was the source of the crisis — although not everyone seems to get this, even now." (Island Nightmares 03/18/2013) Cypriot banks are heavily involved in what Krugman calls "RMML — Russian mobster money laundering":
Cyprus, unfortunately, seems to be making a hash of it. To be fair, the proposed levy on depositors is actually smaller than the real losses Icelandic depositors took (and they lost on their currency holdings too). But this is just the beginning! Even with the effective default on deposits, Cyprus will need a huge loan from the troika, and the condition for this loan will be harsh austerity. This looks like the beginning of endless, inconceivable pain.And Krugman's analysis leads him to the same conclusion as Münchau's. In The Яussians Are Coming! The Яussians Are Coming! 03/18/2013:
And while it looks as if the terms of the deposit tax are being revised, overseas creditors are still getting a much better deal than in Iceland. I’m still trying to figure out the technical aspects here, but it seems clear that one big problem is that Cyprus, unlike Iceland, isn’t willing to put its banking excesses behind it; they’re still trying to hold on to the RMML business, which means less taxation of the RMs and more taxation of locals.
Let me make a broader point: we’ve now seen three island nations around Europe become huge international banking hubs relative to their GDPs, then get into crisis because their domestic economies don’t have the resources to bail out those metastasized banking systems if something goes wrong. This strongly suggests, to me at least, that we have a fundamental problem with the whole architecture (to use the preferred fancy word) of international finance.And in Round Trips to Cyprus 03/20/2013, he makes some helpful observations on "the round-tripping business" with Russian funds.
As long as you haven’t bought into the Barney-Frank-did-it school of thought, you realize that the global crisis of 2008 was in a fundamental sense made possible by the erosion of effective bank regulation. As Gary Gorton (pdf) has documented, we had a 70-year “quiet period” after the Great Depression in which advanced countries had very few major financial flare-ups; Gorton argues, and most of us agree, that the key to this quietness was a constrained, regulated financial system that also limited the opportunities for excessive non-bank leverage.
But this regulation in turn depended, to an important extent, on limited international capital flows; otherwise regulations made in Washington or elsewhere would have been bypassed via havens like, well, Cyprus. And once capital controls began to be lifted in the 1970s we entered an era of ever-bigger financial crises, starting in Latin America, then moving to Asia, and finally striking the whole world.
In the following cartoon depicting her approach to the crisis, Frau Fritz accompanied by Schäuble demands to know, "And who, please tell me, is at fault for the bank crisis and the public debt and the euro crisis?" A man replies, "We small savers, naturally - we lived above our means." An elderly lady says, "Sorry!
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| Frau Fritz and her Finance Minister confront the Cyrpriots (Kluas Stuttmann 19.03.2013) |
Of course, it didn't work out quite that way since Cyprus has now rejecting this particular scheme of Frau Fritz.
Joe Weisenthal also thinks Cyprus is hosed and so is Angie's euro policy, as he explains in
Europe Is A Complete Disaster, And Its Luck May Have Just Run Out Business Insider 03/20/2013. He characterizes Angie-nomics this way:
Outside of Germany, pretty much every economic indicator in the Eurozone just gets worse and worse.Tags: angela merkel, austerity economics, cyprus, eu, euro, european union
While Mario Draghi rightly can claim to be the world's #1 central banker (given the difficult situation he faces, and his limited mandate) leadership remains poor.
In the wake of the Italian election -- wherein incumbent Prime Minister Mario Monti received a pathetic 10% of the vote -- he was praised for having taken the tough unpopular austerity decisions that allowed interest rates to fall as they have. In fact this was nonsense. Interest rates fell because of the ECB. Austerity and reform didn't accomplish squat on their own.
But the beatings will continue until morale improves.
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