The Cyprus banking crisis presents, in microcosm, everything that is perverse about the European leaders’ response to the continuing financial collapse. And bravo to the Cypriot Parliament for rejecting the EU’s insane demand to condition a bank bailout on a large tax on small depositors.
If this crisis threatens to spread to other nations, it’s a good object lesson. Here is the punch line of this column: Its time for Europe’s small nations, who are getting slammed into permanent depression by the arrogance of Berlin and Brussels, to think about abandoning the euro. At least the threat would strengthen their bargaining position, and if they actually quit the euro, the result could hardly be worse than their permanent sentence to debtors’ prison. More on that in a moment.
This is not rocket science, folks—austerity doesn’t work.
The back story: Cyprus, with just over a million people, is not a poor country. Its per capita GDP is actually above the European Union average. Cyprus has only used the euro since 2008.
Once Cyprus was in the Eurozone, like the banks of Ireland and Iceland before them, the two main Cypriot banks got cute. They offered above-market interest rates to suck in lots of deposits, mainly, as it turned out, from Russians. Then, to pay the high interest, they made speculative investments. You can guess the rest.
When the Cyprus government turned to the EU and the European Central Bank for a bailout, the idiots in charge came up with a scheme requiring ordinary depositors to pay for the sins of the bankers. (Imagine if the Fed had done that when it bailed out Wall Street.)
Though the details are much more complex in the austerity schemes imposed on Greece, Spain, Portugal, and Ireland, the basic story is the same. The big guys get greedy and the little guys pay the price. This time, the double standard was even more naked than usual.
The Cyprus government went along, but after massive protests by ordinary citizens, the Parliament failed to approve the tax. So, what now?
The Cypriots tried to do a deal with the Russians, offering to sell them rights of offshore natural gas deposits, in exchange for a bailout by Moscow. But that doesn’t seem to be going forward. So now, the Cypriots, inadvertently, have the power of the weak. If they refuse to cave, their European masters may soften the terms.
Or not. The German government, in particular, is dug in. Fiscal sinners must pay dearly. For now, there’s a bank holiday, withdrawals are strictly limited, and the economy is grinding to a halt.
Interestingly, however, the ECB has not suspended advances to Cypriot banks, which would cause a total collapse with wider repercussions. So what’s really occurring is a high-stakes game of chicken.
Enough is enough, I’d say. These policies of no-mercy have pushed all of Europe into prolonged depression. Unemployment rates in Greece and Spain are upwards of 25 percent. Among the young, they approach 50 percent.
Britain, which doesn’t use the Euro, volunteered for austerity. They more they cut spending and raise taxes, the more the economy shrinks and the worse the ratio of debt to GDP gets—because GDP keeps shrinking as a consequence of the austerity.
This is not rocket science, folks—austerity doesn’t work.
But, austerity elsewhere is good for Germany, because it pulls in capital and leaves Germany with the Continent’s lowest interest rates, and because the euro is an undervalued currency where Germany is concerned, which is good for German exports.
It’s time for the peripheral European countries—Greece, Spain, Portugal, Ireland, and now Cyprus—to push back. Only a unified threat to quit the euro might get the attention of Brussels and Berlin.
What would happen if one or more countries actually reverted to their own currencies? Financial elites around the world say that would be catastrophic, but for Europe’s small nations, the catastrophe is now.
If Cyprus or Greece or Spain or Portugal (or better yet, all of them en bloc) decided to quit the euro and revert to drachmas and pesetas, they would need to block bank accounts, impose currency and capital controls, and default on some of all of their foreign debts, which would be re-denominated in the new local currency. There would be lawsuits up the gazork, but the IMF and ECB would have to step in to limit the broader damage even if they disapproved.
It would not be pretty, but it has been done before. In fact, in the past century, some 69 countries have abandoned currencies. It happened after the break-up of the Soviet Union. It happened after World War II. In fact, withdrawal of the Hitler-era Reichsmark in favor of the post 1948 Deutschmark was accompanied by massive debt relief for Germany. (How about that, Ms. Merkel?)
After a relative brief period of worse economic pain, these small nations would emerge with far greater freedom of action over their own economic destiny. They would have currencies that were a lot cheaper internationally, which would be good for exports and for tourism. In the short run, they would have to finance most of their capital needs internally, but foreign capital would soon return. It always does—especially once economies start growing again. And freed from artificial austerity burdens, these nations could resume growth.
The Germans, of course, would have fits. Because Germany enjoys the greatest advantage from the mismanaged euro and would suffer a relative loss if the Eurozone shrank and some debts to German banks were written off. But what are the Germans going to do—invade? Happily, the allies after World War II insisted on a very small German army.
Even if these nations did not end up actually quitting the euro, a credible threat might get the elite in charge to soften the terms of austerity.
In his poem, “I Sing of Olaf Glad and Big,” an ode to an abused conscientious objector who refused to be cowed by psychological torture and beatings, E.E. Cummings wrote:
Olaf (upon what were once knees)
does almost ceaselessly repeat
“there is some shit I will not eat.”
That’s not a bad credo for the small, peripheral, suffering nations of Europe.
Robert Kuttner is co-founder and co-editor of The American Prospectmagazine, as well as a Distinguished Senior Fellow of the think tankDemos. He was a longtime columnist for Business Week, and continues to write columns in the Boston Globe and Huffington Post. He is the author of A Presidency in Peril: The Inside Story of Obama’s Promise, Wall Street’s Power, and the Struggle to Control our Economic Future,Obama’s Challenge, and other books.