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Eurocrats have ruined Cyprus's economy: who's next?

By       Message Igor Alexeev     Permalink
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View Ratings | Rate It Headlined to H2 3/20/13

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Political tensions between the government of Cyprus and the EU "Troika" are getting stronger. The controversial "savings levy" that would impose a 12.5-percent crisis tax on bank deposits larger than --100,000 and a tax of 3 percent on smaller deposits sparked mass protests on the streets of the island. The opposition in Cyprus has already called the deal "bank robbery". Earlier in March, 2013, the European finance ministers demanded the highly unpopular measure in order to secure a --10 billion bailout.

At one bank in the Limassol district, a frustrated man parked his bulldozer outside and threatened to break in. Angry mob of customers outside banks shouted: "This is robbery and we must get the EU to stop this". And the vice president of the Cyprus Institute of Certified Public Accountants, Marios Skandalis, warned: "There is a very high risk that this could be the end of Cyprus as a strong and reliable financial centre."

But what happened behind the scene? The "Troika" officials decided that it would be a great time to blackmail the government of a small republic. It is always easy for the bureaucrats to be liberal when spending another's money, especially if it belongs to foreign investors. The meeting with Cypriot officials was contentious, Reuters reports. Germany's Schaeuble, Dutch Finance Minister Jeroen Dijsselbloem and negotiators for the ECB, EU and International Monetary Fund broke off several times to talk separately with the Cypriots. Other ministers hung around in the corridors, playing games on their mobile phones.

On March, 18, Cypriot President Nicos Anastasiades decided to fight back against the eurocrats. He held a telephone conversation with European Economic and Monetary Affairs Commissioner Olli Rehn to inform him that there might not be enough parliamentary support for a deposit tax on the island. According to Mega TV, Anastasiades is reported to have said to Rehn and Brok: "When I warned you that there would not be a parliamentary majority to pass the agreement, you didn't want to listen. Give my regards to Mrs Merkel."

What could be the possible results of this short-sighted EU measure, inspired by the worst examples of communist seizures? A failing attempt to "punish" a small island nation can cause devastating repercussions. Banking systems of Greece, Spain and Portugal may collapse like a house of cards in the nearest future, because of a large-scale bank run. It has provoked a massive capital outflow from weak Eurozone countries and the euro hit its lowest point since December, 2012.

"The spirit of protecting deposits has been completely sidestepped. Hitting depositors is no longer hypothetical," one anonymous official from a euro zone country admitted. "The Cypriot government was keener to protect its banking model, which has turned out to be a disastrous political mistake."

Trust in the European financial institutions is undermined, and it is now unclear who will take enormous effort to rebuild. Even worse, the "Troika" has weakened deposit insurance, the principal pillar supporting modern banking system, Forbes wrote on March, 19.
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Cyprus affair is a dangerous precedent not only for Europe, but also for the fragile global economic order. Many keep a watchful eye on the benchmark (or is it better to say scapegoat?) country. Now even the incurable Euro-optimists must admit: the quality of financial governance in the euro zone has deteriorated far beyond repair. Half-baked measures and immense red tape of the impotent European bureaucracy created the situation of chaos and instability. But in the world of finance everybody knows very well: a chain is only as strong as its weakest link. Today we have to wait until the end of this circus show.
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Russian web journalist and researcher in the fields of global economy and energy policy. Route Magazine ( editor and columnist.

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