Saving Cyprus Tapping Bank Customers Is the Right Move
The move in Cyprus to apply a one-time levy on all bank accounts is both a fair and pragmatic way of easing the country's debt burdens. It also marks the start of a new phase in the euro crisis that could have implications for future bailouts.
When historians look back on the euro crisis decades from now, they will likely speak of March 16 as the beginning of its fourth phase. Pressured by the other euro-zone member states, Cyprus is being forced to partially expropriate the funds of banking customers to assist in the country's financial restructuring. This after Cyprus was essentially sucked into the crisis because of its bloated banking sector.
It's a dramatic forced measure, and it won't just hit the pockets of Russian oligarchs who are fond of depositing their money at banks on the Mediterranean island. It will also burden average Cypriot savers. Accounts are being partially frozen, and a vote on a hastily drafted expropriation law is expected in parliament on Monday. And what scenes will unfold when the country's banks reopen their doors on Tuesday? Quite possibly those more associated with crisis-ridden South American countries than Southern European ones.
Still, forcing savers to participate in the bailout is a further step towards greater pragmatism and fairness that has also marked the other important milestones in the euro crisis.
In the beginning, during phase one, the belief that the crisis could be overcome solely with credit guarantees and austerity programs prevailed. In other words, taxpayers within the euro zone were to carry all the burdens. It's a position governments had been pressured to take by financial industry lobbyists. But it's also a path that led to lasting recession in the south and sewed strife between Northern and Southern Europe.
Phase two of the crisis began with the Greek debt haircut and the recognition that the country's creditors also had carry their part of the burden. All of the banks and insurance companies that had so carelessly lent money in Southern Europe finally had to pay up.
A now legendary speech by Mario Draghi, the head of the European Central Bank (ECB) marked the start of phase three. In autumn 2012, he announced that crisis-plagued countries that have undertaken reforms would be provided with ECB support via the purchase of unlimited amounts of sovereign bonds. The move violated all established monetary policy principles in Europe, but proved to be correct and pragmatic during a period of existential threat to the common currency.
Breaking the Next Taboo
And now comes the partial expropriation of bank customers. The move is little more than a symbolic contribution to solving the Cyprus crisis, but it sends an important message: For Europe's taxpayers, it is a question of fairness that they not be left alone to bear the burdens of the costs of the crisis. And it is the only way to prevent the euro crisis from further fomenting anti-EU sentiment in the member states.
For the people of Europe it is a question of fairness. For the politicians seeking to end the crisis, it is one of pragmatism. Taxpayers alone will not be able to buy Europe out of its debt trap. And those who want to solve the problems in the euro zone need to access the money where it can be found: through bondholders, through the ECB, through banking customers and, hopefully, as a next step through the owners of troubled banks, as well as wealthy people living in Southern Europe.
The next taboo-breaking measures are already taking shape on the horizon. Spain is soon expected to use billions in guarantees from the long-term euro rescue fund, the European Stability Mechanism (ESM), to rescue its flagging banks. It will be crucial that the shareholders and creditors of these banks also be drawn into the bailout. Italy could also relieve some of its debt problems if the government finally took the step of implementing a wealth tax that would require the country's richest to contribute to solving the crisis.
Fearing that tapping any of these potential sources of money could have disastrous consequences on the financial markets, many in the past have argued they should be categorically ruled out. But each time that position has proven untenable.