Cyprus and the Russians

As of this writing, the intense negotiations in progress between Cypress and the Troika (EU, ECB, IMF) this weekend over the terms of a bailout of Cyprus and how much austerity the EU lead by German Chancellor Angela "Frau Fritz" Merkel will impose on the people of Cyprus have produced a deal. (Einigung von Regierung und Troika: Zyperns Reiche sollen 20 Prozent Zwangsabgabe zahlen Spiegel Online 23.03.2013) The deal still has to be approved by the Cypriot Parliament. Yanis Varoufakis, commenting on the deal as it looked prior to today's version, says, "Every bailout agreement, beginning with Greece’s in May 2010, seems less logical and more toxic than the previous one. The culmination was of course Cyprus this past week." (While waiting for Cyprus’ Godot .... 03/23/2013)

Cyprus' continuing membership in the eurozone and the EU are also in doubt. The island country does huge business with Russian deposits, which has evidently inspired quite a bit of snark among economists and economic writers about Russian mobsters retaliating against Cypriots who lose them money.

But, as Felix Salmon explains in Cyprus: What are the Russians playing at? 03/22/2013, Cyprus does have a viable geopolitical option of splitting with the EU and aligning with Russia:

... there’s a real possibility — maybe not an outright probability, but certainly a good chance — that Cyprus will end up ... and becoming a Russian client state, either inside or outside the euro. After all, Cyprus is a Eurogroup client state right now, and has wound up in this sorry place as a result. If it [accepts an EU bailout under the onerous conditions on which Merkel will insist], it will have essentially no autonomy for the foreseeable future in any case.

It's also easy to imagine that Putin’s Russia views its relations with the EU as something of a zero-sum game. Russia also has a more than 150-year obsession with acquiring influence, if not outright control, over warm-water ports in Southern Europe. Looked at that way, the loss of Cyprus from the EU to Russia would be a clear loss to the EU and a clear win for Russia.

This is a reminder of how Frau Fritz' nationalistic use of the euro currency has throttled much of the democratic justification for the European Union. If Cyprus accepts an EU bailout, it will see its economy hammered just like Greece, Ireland, Italy, Portugal and Spain have been, with no clear end in sight for any of those five countries.

Their best option right now is an Argentine/Icelandic solution: get out of the euro currency, reorganize the banks that face bankruptcy, try to minimize the harm to ordinary Cypriots of the immediate aftermath, and then start growing again free of Frau Fritz' shackles. Wolfgang Münchau in Jetzt hilft nur der Staatsbankrott Spiegel Online 20.03.2013 writes, "Ein Bankrott mit Euro-Austritt ist keineswegs das schlimmste Szenario. Das schlimmste ist, wenn man Deutschland und Zypern in einer Währungsunion zusammenleben lässt, die beide Länder nicht wirklich mittragen." ("A bankruptcy with and exit from the euro is by no means the worst scenario. The worst is, if Germany and Cyprus remain in a currency union that both countries don't truly back.")

Münchau also writes in Die vier Zeitbomben der Kanzlerin Spiegel Online 13.03.2013 about the dilemma Cyprus creates for Frau Fritz in this parliamentary election year in Germany. Thanks to the ECB's action in mid-2012 that caused speculators to back off from attacks on the national debt of the distressed eurozone countries, German polls are showing that most voters thinks Frau Fritz has done a good job in handling the euro crisis. The lazy opposition SPD, whose leadership is as bankrupt in this crisis as Frau Fritz, have supported her austerity policies for the eurozone victim countries, so they are not trying to build a constructive alternative. In fact, they are posturing right now to show German voters they want to be tough on Cyprus, as well. It's possible that the German Bundestag could wind up failing to approve the deal even if the Parliament in Cyprus does.

And that very failing of the center-left parties to challenge the austerity consensus, a problem occurring in other countries as well, including France, Italy and Spain, is a major feature in the current euro crisis.

Salmon concludes his piece:

There’s no doubt that the best outcome for Cyprus, and for the EU, would be for Russia to extend its help now, before Cyprus’s banks reopen on Tuesday. But Russia doesn’t want what's best for Cyprus, or for the EU: Russia wants what’s best for Russia. And the way it’s acting reminds me of nothing so much as a classic Wall Street bear raid, designed to drive down the price of something you want to be able to pick up very, very cheap. What’s more, it might even work.

Tags: angela merkel, austerity economics, eu, euro, european union, cyprus