Thursday, March 28, 2013

Chancellor Angela Merkel, together with the IMF and the European Central Bank, has succeeded, under extreme circumstances, in imposing draconian and humiliating economic conditions on Cyprus. In this way, Cyprus has avoided bankruptcy, which would almost certainly have led to it leaving the Eurozone immediately.

The plan is as harsh as the previous one, which was rejected by parliament last week, with only some minor technical modifications. In exchange for not affecting small savers, it imposes fees on large depositors (including many rich Russians) and other investors, and restrictions on the movement of capital. The losses are going to be substantial despite the fact that in the weeks before bank accounts were frozen there was apparently a large scale flight of capital, as the government’s plans were leaked to the Russian and local oligarchs. With the decision to liquidate the Laiki Bank, the second-largest bank in Cyprus, the Eurozone leaders have for the first time since the beginning of the euro crisis at the end of 2009 refused to come to the aid of a financial institution. The entire banking sector will be restructured, putting an end to the island’s business model. The agreement does not require parliamentary approval.

Although the article ‘A new phase in the crisis of the euro’ [1]was written before this agreement, when there was uncertainty over the fate of Cyprus, it is still relevant today for the following economic and political reasons:

(1) The bailout programme and the austerity imposed with it are going to be brutal. José Manuel Durão Barroso, President of the European Commission, has warned of an economic shock in the region. Many people will lose their jobs, and their efforts to have a better life will be wasted. Their pensions, saved during their whole lives, could suffer the same fate as the deposits and be wiped out. It is the beginning of a long ordeal.

(2) Russia has sharply criticised the bailout agreement for Cyprus: Prime Minister Dmitry Medvedev accused the EU of robbery. Russian state television compared the confiscation of rich investors – many of them from Russia – to the expropriation of the Jews by Nazi Germany. Although the commercial ties between the EU and Russia are too strong to be broken by what has happened on the island, the relationship has deteriorated.

(3) As we expected, Cyprus is a turning point in the treatment of savers and debtor countries. On Monday March 25, the President of the Eurogroup, Jeroen Dijsselbloem, stated that the fee imposed on bank accounts in Cyprus established a precedent and that this could also happen in other countries, which made the European stock markets fall. After Cyprus, confidence in the banking system has deteriorated, even for small savers.

(4) Although an agreement was finally reached, the tough negotiations clearly show the growing gap between the northern European creditor countries and the debtor countries of southern Europe, among which, political differences could soon become more dangerous than the monetary crisis, openly threatening the political foundations of the Eurozone.

(5) Finally, in Cyprus, as a result of the government’s weakness and its lack of a majority in parliament to impose the entire programme, the situation is very uncertain. Everything will depend on how the bailout is applied, on the ‘degree of social consensus’ and on the response of the population – which is still shocked by the measures imposed by the big European powers and endorsed by its own government. In other words, we can ask: has the threat of an exit from the Eurozone by Cyprus been avoided or only postponed?

Translation by Yosef M