The EU game has no real rules
Published in Business Spectator (Melbourne), 19 March 2013
When I last wrote about Cyprus, the eurozone faced a political and economic dilemma in its smallest member state (The spectre protecting a sinful little Cyprus, January 24). With last weekend’s bailout, Europe’s politicians have once again managed to make a bad situation worse.
The haircut for depositors of Cypriot banks is not the first time the EU has thrown its own rulebook overboard. That would have been bad enough. What is worse though is that it sends a strong signal to anyone doing business in any of the eurozone’s struggling economies: get out while you still can!
The whole history of European Monetary Union is of lawlessness based on political convenience. The euro was meant to be safeguarded by the Maastricht Treaty with its rules on economic convergence, debt and deficit criteria.
These rules were not even applied in the very beginning of monetary union when countries such as Greece, Italy and Belgium were admitted even though their debt loads were much higher than the then officially allowed 60 per cent of GDP mark.
The rules were breached again when France and Germany were running deficits higher than 3 per cent of GDP early in the century. Apart from a few admonishing words from the EU Commission, no sanctions followed these breaches. As a result, other countries felt encouraged to interpret the rules creatively themselves.
Then when the eurozone crisis properly started with Greece in late 2009, the no bailout clause only lasted for about half a year. In May 2010, the first rescue package for Greece was put together, making a mockery out of previous assurances that no country within monetary union would ever guarantee the debts of others.
What was meant to be a one-off rescue for Greece, never to be done again anywhere else, later got repeated for Ireland, Portugal, Spain – and Greece once again when the initial package’s money turned out to be insufficient.
In the meantime, solemn promises that within the eurozone no country would ever default did not last long either. Greece got its haircut eventually though it didn’t solve the Greek problem but at least it made clear how much you can trust the EU’s official assurance. Not at all.
In between all of this, there is the European Central Bank whose original mandate was to keep prices stable and remain independent from political interference. The same central bank then redefined its mission to do ‘whatever it takes’ to save the euro.
So the ECB became engaged in purchasing government bonds and rescuing struggling financial institutions. None of these actions are compatible with the spirit of EU treaty law but necessity proved the mother of invention.
As if all of this had not already been bad enough, the temporary rescue funds European Financial Stability Facility was meant to be just that: temporary. Until of course it became permanent by being replaced by the European Stability Mechanism. Except that that ESM still was not large enough so they let the EFSF continue to run in parallel.
Needless to say the ESM was only meant to help governments that are unable to access capital markets. It was initially not constructed as a tool for the recapitalisation of a country’s banking sector. But then Spain’s banks needed help, and guess where the money came from? The ESM, of course.
And now Cyprus. We can still remember how just a few weeks ago any kind of depositor haircut was categorically ruled out. Not just that, it looked illegal. After all, under the Cypriot deposit protection scheme all deposits of up to €100,000 were fully insured against a bank’s default. Too bad they were not protected against the special levy the EU now imposed on savings held in Cypriot banks. So when a bank defaults but the haircut is masked as a tax, then it’s not really a default, or is it?
Even the fact that Cyprus will get any money at all from the ESM is a hard to explain. Tiny Cyprus is hardly systemic, nor has it done anything to suggest it would deserve a bailout from its European partners. Its crisis is entirely of its own making and the result of an absurdly grown financial sector. If the EU opens its cheque books for Cyprus, it will not have any excuses in the future for not bailing out any other country.
The tragedy of the situation becomes clear when imagining the outcome of the Cypriot bailout. Assuming it works, this would make it likely that we will see similar depositor haircuts in other countries. Under such circumstances, would anyone seriously want to keep his cash in Italy, Spain, Portugal or even France?
If it doesn’t work, however, then in all likelihood we may expect even more and even harsher measures in the future. The first depositors levy would then only be the beginning. That is, of course, if anyone is still dumb enough to keep any money in Cypriot banks after this first haircut which was never meant to happen.
And why keep money in European banks anyway at a time when it hardly earns any interest thanks to the ECB’s ultra-loose monetary policy? European savers may soon conclude that their savings are much safer under their mattresses or their piggy banks than in any eurozone bank account. Savers have just seen how fast the EU and national governments can confiscate their money when it appears politically necessary.
The partial expropriation is just the last example in a long tradition of European lawlessness. Europe as such has become a sovereign risk.
You cannot trust the EU any longer to play by its own rules. You cannot trust the ECB to keep the purchasing power of the euro stable. You cannot trust eurozone governments to pay back their debt, and you cannot trust that money deposited in eurozone bank accounts will still be there when you want to withdraw it.
All you can trust is the European politics elite to do everything to keep their pet project of monetary union alive. The measures may not be legal; they may be unequitable; they may not even work; and the rules of the game may change at random from week to week.
If you can live with that because you somehow think that the euro is worth it, then by all means stay in Europe. But if not, then you better get out of there before it’s too late.