Thursday 21 March 2013

Economic Union and Cyprus

The crisis flared up in a shocking manner this week as Cyprus, long on the list of potential bail-out countries, found itself at the centre of the Eurocrisis after the controversial bail-out deal was rejected by the Cypriot parliament. The ECB has extended its emergency credit to the Central Bank of Cyprus until Monday, giving the country some more time to find a Plan B. Cyprus is increasingly looking to Russia for support (Russia has already loaned Cyprus some money), and there is a media battle over the rights and wrongs of the bail-out conditions. The decision to tax bank depositors as a one-off was always going to have a knock on confidence, and the confusion over who decided what is increasing with a PR war over the decision to extend the tax to depositors with accounts of under €100,000.

The head of the Euro Group, Jeroen Dijsselbloem, was in the European Parliament today to answer questions on the crisis, and European Council President Van Rompuy and Commissioner Maroš Šefčovič were grilled by the Parliament yesterday. The deposit tax was attacked from across the political spectrum:

"My question is: how come all of a sudden small savings and depositors are no longer protected? This is a dangerous precedent. It takes years to recover trust by depositors. Why hit the small savers? The crisis in Cyprus has sounded an alarm bell. We have to speed up the regulation of financial markets. Above all, we need a European solution to the Cyprus problem, not a Russian one." - Corien Wortmann-Kool, vice chairwoman of the centre-right European People's Party.

"The European law is very clear: all deposits below €100,000 must be guaranteed in case of bank failure. We urged the Cypriot government and the European authorities to come up with an alternative solution that protects the savings of ordinary citizens. The EU has made huge progress on strengthening the stability of the eurozone with the recent agreement to set up a single European supervisor to oversee the banks, and the new rules on capital requirements for banks (the so-called 'CRD IV' package). We need to do more by setting up a European resolution mechanism in case of bank failures." - Elisa Ferreira, S&D spokesperson for economic and monetary affairs.

"A banking union must protect the bank customers, especially the ordinary depositors rather than the bond holders and creditors. Nor does the decision do anything to break the link between banks and sovereigns. It is totally incomprehensible and undermines the credibility and legitimacy of the EU and its new financial structures to restore stability." – Guy Verhofstadt, leader of the Liberal ALDE group.

“While it is clear that a bailout is necessary to protect Cyprus from eventual bankruptcy, the tax on bank deposits will risk destabilising the complete structure of the Cypriot banking system, and is an aggressive gesture by the Eurogroup to the population of Cyprus.” - Monica Frassoni, European Green Party co-Chair.

The shambolic approach to bail-outs highlights again that the EU is operating in a piecemeal way to the crisis and has little coherence to its responses. The demand for a deposit tax doesn’t sit well with bank deposit guarantees, the aim of protecting depositors or breaking the link between sovereigns and the banking system as was agreed at the European Council summit in June.

Ironically yesterday the Commission unveiled further plans on economic and monetary union to increase co-ordination on important economic policies including the areas of “competitiveness, employment, market functioning, tax systems, financial stability and fiscal sustainability”, as well as further developing this contractual approach to financial assistance in the form of “Convergence and Competitiveness Instruments” (CCIs). These proposals aren’t yet legislative proposals, but they underline the technocratic approach:

What would the ex-ante coordination process look like?

A Member State would provide information on a major economic reform plan in its National Reform Programme (on economic policies for the coming year) or at another time during the year. The Commission would assess the plan and deliver an opinion on it. The Commission's assessment would cover the extent to which the reform tackles the specific policy challenges and how it would improve competitiveness and adjustment capacity. The Commission's assessment would pay particular attention to the impact the reform would have on the functioning of the euro area and possible spillover effects on other Member States. These plans will then be discussed by the Council of Ministers and the Eurogroup. The Commission and the Council can suggest modifications to the national reform plan where they could be justified by the expected effects on other Member States and the functioning of the Economic and Monetary Union.”

Without oversight and accountable political decision-making at the European level to decide on what kind of Eurozone we want in the first place, the coordination and the negotiation of the CCIs will be based on a technocratic vision of the Eurozone. If the CCIs are to form a pillar of Eurozone economic and social policy, shouldn’t there be a Eurozone framework drawn up by the European Parliament that identifies economic and social priorities regularly to guide this, rather than technocratic priorities being enshrined? Currently bail-out deals seem to be ad hoc and unprincipled, with disastrous results for policy making.


  1. Exit the Euro and return to the Cyprus Pound

    This option would require a deflation of approximately 20-30% along with the significant cost of actually converting the currency and financial instruments. While it would be very difficult in the short term, it would yield several important benefits in the longer term. The country would regain the ability to independently adjust the value of their currency to suit domestic financial conditions instead of being at the mercy of stronger northern EU member states. It would allow them to keep access to the potentially lucrative offshore gas fields. It would give them an opportunity to restructure and further legitimize their banking system

  2. I hope that Cyprus can get over from this economic crisis. I wish that it would be helped by those countries with stable economy.