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