Cyprus is on the edge of total bankruptcy. The European Union has offered them a bail out but Cyprus has to come up with a contribution of their own in order to get the bailout, which the EU and the IMF have suggested come from a 10% tax on the savings deposited in the Cypriot banks. The Cypriot parliament, in the face of mass demonstrations on the street, have just refused to authorize such a tax. Right now the situation is in stale-mate. The banks have been closed for the holiday, and now seem to be in lock down. Once the cash in the cash machines runs out, people will be running out of money.
I see the Cyprus situation as quite grave – not just for Cyprus, not just for Europe, but for the world economy, with all the implications for war and strife that entails. I cannot see a solution, but what is more worrying, no economists of almost any persuasion is offering one either. They all do agree that the collapse of the euro could be close to catastrophic, and I’ve read a lot of analyses about what went wrong, but how to fix it feels like asking how to get somebody out who is fast sinking into quick sand.
The European Union began as a free trade union to bind Europe’s nations together so that something like WWII would never happen again. But the currency union which came later was cobbled together by politicians against the advice of economists who said that it could not work unless participating nations were more fiscally united. As it is, each country still runs its own budgets. The Mediterranean countries like Italy, Spain, Greece, even France, continue to run up deficits that they used to deal with by devaluing their currencies, but which is not possible when they are tied to the euro. Meanwhile, Germany has greatly increased its productivity, and benefited greatly from a euro that is undervalued relative to the strength of their economy. Even with the re-integration of eastern Germany, they are now by far the strongest economy in Europe.
The Germans do not want to see the euro destroyed — they have benefited from it too much, and will also be badly burned if it goes down. But they are not willing to bail out other countries who they see as having failed to grasp the nettle. Meanwhile, countries that suffered under Germany during WWII are arguing that this is WWIII fought on the economic front, and Cyprus said in words of one syllable today that they would choose bankruptcy and bring Germany down with them rather than let Germany dictate a 10% tax on all their savings.
On the other hand, Cyprus is awash with billions of euros of corrupt money of Russians storing their ill-gotten gains in Cypriot banks. They would be hit by the tax, which is why Putin called it unfair but might also be why Brussels as well as the IMF would be happy with it. Unfortunately the Cypriot banks themselves are not being asked to pay the price; their savers are.
There is a lot of blame – both in Brussels, and among individual national governments who have lied both about the size of the deficits they have run up and to the people who elected them. The people least responsible for the debacle, the working people, are the ones being asked to pay the highest price.
The problem, though, is that I don’t see a way to protect the average worker. Period.
In some ways it’s just like Syria – hundreds of thousands of people have been killed, and millions of people are now refugees. But I have little hope that Muslim Brotherhood, or the Sunnis who are among the rebels, will be any better than Assad who is an Alawaite, a third Muslim group exiled to the mountains for years by the ruling Sunnis until Assad’s father got control. The Sunnis and the Shias have been at each other’s throats since Mohammed died, and whether it’s Iraq, Iran, Syria, Lebanon, Egypt, Saudi Arabia, etc., they view each other as heretics whom they have a God-given mission to wipe from the face of the earth. It makes Northern Ireland look like a child’s sandbox.
Frankly, I’m glad I’m not running the world.
But I wish I thought the people who are were better at it than I would be.