German Economist: 'Europe's Citizens Now Have to Fear for Their Money'

Cypriots show their palms reading "No" during a protest against an EU bailout deal outside the parliament in Nicosia on Monday. Zoom
AFP

Cypriots show their palms reading "No" during a protest against an EU bailout deal outside the parliament in Nicosia on Monday.

For the first time, bank customers in a crisis-plagued euro-zone country are being forced to contribute to its bailout. In an interview, German economist Peter Bofinger warns the strategy is "extremely dangerous" and could lead to a run on banks.

SPIEGEL ONLINE: Mr. Bofinger, Cyprus will be saved -- and every Cypriot bank customer will have to pay up. Whether that person is Greek or Russian, whether they have €1,000 or €10 million in their account, part of that person's savings will be taken. Is this a good strategy?

Bofinger: It is the worst possible. Making small-scale savers pay is extremely dangerous. It will shake the trust of depositors across the Continent. Europe's citizens now have to fear for their money.

SPIEGEL ONLINE: Do you expect that despositors in Spain, Italy, Portugal and other crisis-plagued countries will make a run on their accounts because they, too, might have to pay someday?

Bofinger: Yes. These fears will now be stoked. The Spaniards, Italians and Portuguese may not run to the banks today or tomorrow, but as soon as the crisis intensifies in a euro-zone country, the bank customers will remember Cyprus. They will withdraw their money and, by doing so, intensify the crisis.

SPIEGEL ONLINE: The Cypriot government wants to minimize this panic effect. The Wall Street Journal reported today that the latest proposal in Nicosia would include only a 3-percent one-time levy for small-scale depositors rather than the 6.75 percent tax included in the deal reached in Brussels over the weekend.

Bofinger: That wouldn't change anything. If you live in a home, then you expect 100 percent safety. If someone says to you, "Three percent of your roof could cave in," then you still wouldn't want to live there anymore.

SPIEGEL ONLINE: The euro-zone partner countries seeking to provide Cyprus with a bailout view the participation of small-scale depositors as a necessary evil. This is because any aid provided by the long-term euro rescue fund, the European Stability Mechanism (ESM), would be added on top of Cyprus's national debt. Without the contributions of bank customers, the government's debt level would be unsustainable.

Bofinger: Shaking the confidence of depositors across Europe cannot be the solution. Those seeking to save the euro should be contributing true aid during an emergency.

SPIEGEL ONLINE: You mean they should give free money to Cyprus?

Bofinger: At the end of the day, it would be better to take charge and provide a billion euros to rescue the small-scale savers in Cyprus than to risk a collapse of the euro financial system.

SPIEGEL ONLINE: But that would also mean entering into a transfer union and breaking another taboo that is at least as big. Greece, Portugal, Spain and co. would want their money for free in the future, too.

Bofinger: That can be easily avoided. Cyprus is a special case, and it can be communicated as such. No other euro-zone country in Southern Europe has such a bloated financial sector. And there is no other country that could have a comparable domino effect in the euro crisis. Cypriot banks lent some €22 billion to Greek firms and private households, and they have suffered very high losses as a result of the restructuring of Greek bonds.

SPIEGEL ONLINE: Nevertheless, it would be almost impossible to justify giving money away to a crisis country for free. How is Finance Minister Wolfgang Schäuble supposed to explain to parliament that he is giving away German taxpayers' money to a government that is accused of having insufficient controls against money laundering?

Bofinger: Such political failings should be dealt with as quickly as possible. But the main issue here is not Cyprus. It's how we guarantee the euro's stability. That's also in Germany's interest.

SPIEGEL ONLINE: In what sense?

Bofinger: After the election in Italy, the situation within the currency union is once again very unstable. An end of the common currency would be the equivalent of a nuclear meltdown for German industry. The question is this: How can the euro be stabilized as cost-efficiently as possible? If depositors across Europe make a run on their accounts, the rescue will get a lot more expensive than it would if money were raised to save the small-scale depositors in Cyprus.

SPIEGEL ONLINE: The participation of Cypriot bank customers also serves another purpose. The financial institutions are holding a lot of money from wealthy Russians in their accounts. Some believe those accounts contain illicit funds from money laundering. The partial expropriation of depositors is supposed to counter the accusation that the ESM has become a bailout package for Russians.

Bofinger: There are better solutions for that, too. Depositors with up to €100,000 should be able to keep all their money. But richer depositors should be made to pay more. For example, starting at €1 million, 20 percent of an account's savings could be seized. At €10 million, that figure could be 30 percent. One could also review whether it would be legal to tax depositors from non-EU countries in Europe at a greater rate.

SPIEGEL ONLINE: So you're calling for a bigger compulsory levy for Russians than for Europeans?

Bofinger: Why not?

Interview conducted by Stefan Schultz

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1. Transgressing The Red Line Of 100.000 Euros
glafkos 03/18/2013
Following the recent unique, malicious and unexpected monetary attack («crash-test» against peoples bank savings below 100.000 euros, on the island of Cyprus, by the Eurogroup and the Troika, It is gradually becoming more and more obvious that bank users Globally can no longer trust the Banks and to be more precise Banks in the euro zone and in particular Germany or under the influence of the German minister of finance, as he seems to be one of the major master minds behind this «ingenious» plan!. Cyprus (an E.U member) is now abandoned to swim in a «perfect storm», in a huge ocean of mistrust. The country is forced to carefully proceed with last resource survival actions. The intensity of these survival measures need to be analogous to the intensity of the attack Cyprus is receiving from her own European Union «allies» and the Troika. Over 100 years ago Cypriots stoped saving gold and valuables under the ground and commenced using banks for saving there life time savings exactly as many human beings do nowadays. Today irrespective of reasons, their money is being literally stolen (illegal circumstances and even global and european monetary law infringements indicate that this attack below 100.000 euros, is neither a «tax» nor a «levy»). Cypriot bank users are just over half a million, however German and Global bank users are slightly more!! The recently exhibited paradigm of the German – Dutch way of handling of the particular issue, will teach global Bank users a very useful lesson! (Especially those dealing with German and Dutch banks with a savings account of less than 100.000 euros!). Since the dawn of history the european island of Cyprus has always been under military attacks by neighbouring countries and even by non-neighbouring countries. Turkey being the last one. However this is the first time in its over 12.000 years of history that the island faces this modern, contemporary type, state of the art, fiscal attack! Without armies and without weapons! It is under these grave circumstances that Cyprus shall have to rigorously seek assistance from her statutory debtors like her three constitutional Guarantors. According to the Zurich agreements of 1960 the UK is using approximately 3% of the surface area of the Island for her air force bases and other militarily needs. The U.K. unforunately had been paying the agreed rent only for 3 years! From 1960 to 1963. Since then, in spite of the fact that U.K, still continuous unobstructed using these facilities, yet has failed to comply with the annual rental payment to the Republic of Cyprus for over 50 years! Now it is time to do so. In a similar manner Turkey as a constitutional guarantor has infringed its own obligation and continuous to illegally occupy since 1974, 37% of the island. Since 1974 Turkey has paid a compensation for this, only to very few Greek Cypriots, whilst owing to over 100 thousand Greek Cypriot refugees, at least 300 billion sterling! On top of these, Greek Cypriots (Not Turkish Cypriots) are now being forced to accept a «legalized» robbery of 6,75% of their lifetime savings under the disguise of a so called «solidarity» levy! If the Parliament of Cyprus proceeds by accepting the above, illegal, (robbing accounts less than 100.000) bail-out plan, imposed by his excellency Finance Minister Schäuble and the Troika we may positively state that the door of the nuthouse is indeed wide open!
2. The EU has given a whole new meaning to the terms ‘bank robbery’ and ‘hold up’
Morthole 03/19/2013
I see that the EU has given a whole new meaning to the terms ‘bank robbery’ and ‘hold up’ with its iniquitous, peremptory decision, taken overnight behind closed doors by unelected, shadowy figures who cannot be named, to levy 6.5% or 9.99% on deposits held by Cypriots in their bank accounts, and to close all ATMs until Tuesday. Many will shrug and mutter that Cyprus doesn’t matter and they should never have joined the EZ in the first place, which of course is true, while the ignorant will say they’re only getting what they deserve, being “lazy” and “unreliable”, forgetting of course that the EU admitted Cyprus unreservedly (no doubt with the support at the time of these same ignorants who are now saying they can go hang) and even broke yet another of its own rulings to do so, in this case that a divided country could not be a EU/EZ member. I know Cyprus well. Not all Cypriots are money launderers or millionaire Russian ex-pats, but very ordinary, mostly poor people who , like others , have been conned into joining a currency that suits no country in the region, if it suits anyone. The EU has probably decided to use Cyprus as a Guinea pig and are ‘trying it on’, so to speak. If Cypriots knuckle down after a few bleats and accept the unacceptable, then this will be noted for further use. I hope certain other EZ members are not claiming “There but for the Grace of God go I”.
3. To pull all money out of banks that is the question : ))
TheRockinCactus 03/20/2013
This situation might cause Panic, and many will run to take there money out of banks. The other problem is the lack of gold, most who own gold and have the bank handle it is just a fancy paper : )~
4.
deeegeee 03/24/2013
---Quote (Originally by glafkos)--- Following the recent unique, malicious and unexpected monetary attack («crash-test» against peoples bank savings below 100.000 euros, on the island of Cyprus, by the Eurogroup and the Troika, It is gradually becoming more and more obvious that bank users Globally can no longer trust the Banks and to be more precise Banks in the euro zone and in particular Germany or under the influence of the German minister of finance, as he seems to be one of the major master minds behind this «ingenious» plan!. Cyprus (an E.U member) is now abandoned to swim in a «perfect storm», in a huge ocean of mistrust. The country is forced to carefully proceed with last resource survival actions. The intensity of these survival measures need to be analogous to the intensity of the attack Cyprus is receiving from her own European Union «allies» and the Troika. Over 100 years ago Cypriots stoped saving gold and valuables under the ground and commenced using banks for saving there life time savings exactly as many human beings do nowadays. Today irrespective of reasons, their money is being literally stolen (illegal circumstances and even global and european monetary law infringements indicate that this attack below 100.000 euros, is neither a «tax» nor a «levy»). Cypriot bank users are just over half a million, however German and Global bank users are slightly more!! The recently exhibited paradigm of the German – Dutch way of handling of the particular issue, will teach global Bank users a very useful lesson! (Especially those dealing with German and Dutch banks with a savings account of less than 100.000 euros!). Since the dawn of history the european island of Cyprus has always been under military attacks by neighbouring countries and even by non-neighbouring countries. Turkey being the last one. However this is the first time in its over 12.000 years of history that the island faces this modern, contemporary type, state of the art, fiscal attack! Without armies and without weapons! It is under these grave circumstances that Cyprus shall have to rigorously seek assistance from her statutory debtors like her three constitutional Guarantors. According to the Zurich agreements of 1960 the UK is using approximately 3% of the surface area of the Island for her air force bases and other militarily needs. The U.K. unforunately had been paying the agreed rent only for 3 years! From 1960 to 1963. Since then, in spite of the fact that U.K, still continuous unobstructed using these facilities, yet has failed to comply with the annual rental payment to the Republic of Cyprus for over 50 years! Now it is time to do so. In a similar manner Turkey as a constitutional guarantor has infringed its own obligation and continuous to illegally occupy since 1974, 37% of the island. Since 1974 Turkey has paid a compensation for this, only to very few Greek Cypriots, whilst owing to over 100 thousand Greek Cypriot refugees, at least 300 billion sterling! On top of these, Greek Cypriots (Not Turkish Cypriots) are now being forced to accept a «legalized» robbery of 6,75% of their lifetime savings under the disguise of a so called «solidarity» levy! If the Parliament of Cyprus proceeds by accepting the above, illegal, (robbing accounts less than 100.000) bail-out plan, imposed by his excellency Finance Minister Schäuble and the Troika we may positively state that the door of the nuthouse is indeed wide open! ---End Quote--- How about reading Churchill's book "The Gathering Storm"It's all happened before !
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About Peter Bofinger
  • DPA
    Peter Bofinger has been a member of the government-appointed German Council of Economic Experts known colloquially here as the "Five Wise Men" since 2004. He is a professor of monetary policy and international economics at the University of Würzburg. His most recent book, published in German, is called "Ist der Markt noch zu retten?" ("Can the Market Still Be Saved?").

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