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26.03.2013. A ruthless fight for Europe?

EU leaders purposely crushed the Cypriot banking system so as to frighten other debtors
Just to get this straight, I don’t have any secret information on the real reason for the Eurogroup’s sudden ultimatum to Cyprus on taxing deposits, that is, to expropriate them partially in exchange for European loans, without which the banking system would collapse. The banking system, in fact, together with the leisure industry, forms Cyprus’ economy. That said, I have my own hypothesis which differs from most of the explanations we have heard so far.
Let me start with the reasons given in the Russian and foreign press. This tax is said to be directed against Russian offshore companies and dirty money. This is possible, but only partly applicable. If any large Russian company or billionaire who kept serious amounts of money in Cyprus did not withdraw them after the start of the financial crunch, especially after the de facto default in Greece, I would have major doubts over these people’s and their advisors’ level of competence. I think most of these funds were withdrawn. Losses will be sustained by holders of frozen accounts, whose money may disappear altogether. But these accounts do not only belong to Russians, but also to many Brits, Germans, other Europeans and Israelis. The accounts of Russian companies which use Cypriot banks may be frozen. I’m fairly sure that the correspondent banking sums are fairly small. However the suspension of payments will entail losses.
A natural question suggests itself – why do we still not have the kind of banking system and, most importantly, legal system which encourages Russian business to bank at home? At the moment they prefer to carry out even trivial transactions abroad.
Other experts, including our leaders, say that the idea of restoring the solvency of Cypriot banks through partial expropriation of their funds is not only absurd, but also unjust, unprofessional and dangerous. Our major financial expert Alexei Kudrin primarily blames the Cypriot crisis on the EU and Euro regulators which failed, or did not wish to resolve its debt problem.
I can agree with almost all the explanations, but I find it hard to believe that the Eurogroup is completely unprofessional. The Eurogroup is the Eurozone governing committee, where Germany plays first fiddle. Naturally, mistakes may happen, all the more so in the current disastrous circumstances. But here, probably, I think we are not talking about a mistake, but a deliberate move, albeit a risky one.  If they hadn’t taken this kind of step, the prospects of the EU and the Euro would have looked desperate.
Let us recall some of the reasons why this full-scale European crisis came about. Euphoric at the downfall of communism, the European community quickly expanded the EU and the Eurozone, and on almost no terms, admitted countries which were economically and culturally a far cry from the EU founders. France pushed through the Euro to get rid of the Deutschmark, which was bound to become Europe’s main currency after Germany’s reunification. In fact, France made its consent to the reunification dependent on Chancellor Helmut Kohl’s agreement to switch to the Euro. However, common political management of the Eurozone economies and finances was not introduced, so the Euro was on shaky ground.
Less developed and less competitive countries made the most of these changes and started borrowing across the board. Other EU members turned a blind eye to this outrageous conduct out of ideological considerations and the reluctance to admit  their mistakes. The 2008 crisis revealed the incapacity of the model. The majority of southern European countries failed to collect taxes and took out unsecured debts – most frequently from Germany, or countries with similar labor ethics. Working little, they were living better and better, using the model of social capitalism, but only its socialist part.
Euphoria again at the newly opened markets of socialist countries distracted most EU members from the need for structural reform and increased competitiveness. Only Germany, Sweden and a number of other northern European countries carried out measures in this regard.
After 2008, the EU started on a complex, murky struggle to compel its members to pay their way. As a result, living standards went down. Pension systems had collapsed because people were living longer. The average European studied until aged 27, then worked half-heartedly for another 25 or 30 years, taking long holidays and even breaks with unemployment benefits, and then retired on decent pensions for another 25 years.
Some progress was made in the course of this struggle. Heroic Italian Prime Minister Mario Monti increased the pensionable age by seven years in one go and also raised tax collection. He was thrown out in the first serious elections and now Italy is in for another chain of ineffective governments.
The tough austerity measures imposed on Greece, Portugal and Spain triggered a wave of social protests. It is clear that under the current model of democracy, governments which impose massive poverty on their people on behalf of Europe – even if they are right to do so – are most probably doomed.
The current political systems in European countries are drifting towards more authoritarian rule, or collapse. The transformation will go on for a long time and the outcome is unpredictable. Moreover, Europe is in the throes of economic stagnation and may well be swept by a new crisis.
Meanwhile, Germany and its EU allies tried to introduce elements of supra-national financial management in the EU, but were rebuffed by the majority in the EU, tacitly led by France, which did not wish to forego their sovereignty or start living within their income.
For the last two years Berlin has been bombarded with appeals and demands to settle other countries’ debts by using various financial instruments. Indeed, Berlin has been doing this for more than two decades now. As a result, those who don’t want to work or pay taxes have only become more demanding.
Chancellor Angela Merkel spoke about solidarity and the need for greater democracy. Thanks to some skillful maneuvering, she kept her place in power, although she was obliged to spend large German and EU funds to feign attempts to rescue the debtors. Last year the EU did not dare crush Greece, a relatively large country. As a result, the state of the EU continued to worsen and the hope that it would get back to normal, or even survive as a functioning entity, was going up in smoke. Optimistic statements from Brussels and other capitals   seemed ridiculous.
I was quite depressed by these developments. We may have grievances against EU bureaucrats or EU policy towards Russia, but the union is the highest achievement of human civilization in terms of peaceful and humane management. It is a blessing for Russia. The EU suppresses state nationalism in Europe – a centuries-long source of trouble and threat for all, and primarily for Russia. The EU is our largest trade partner. Last but not least, Europe has always been the source of Russia’s cultural and economic modernization. Its current crisis has already considerably weakened our drive for modernization.
Let’s return to the events in Cyprus. The demand to tax deposits really would be absurd and unprofessional if it were aimed at rescuing its banking and economic systems. By agreeing to it, Cypriot MPs committed a political hara-kiri. The national banking system was doomed by the ultimatum.
Banks are built on trust. Cypriots agreed to the confiscation tax. This means trust in the banking system has been irrevocably lost. It won’t be restored in the foreseeable future, even if Europe and the IMF step in to help Cypriot banks.
Eurogroup financiers were bound to know this. So, they destroyed the Cypriot banking system for a reason. In so doing, they realized that they would also damage the reputation of the entire EU banking system, which would lead to a large-scale outflow of funds to other banks, primarily in Asia. Indeed, it is absurd to risk the stability and reputation of Europe’s entire financial system, possibly losing tens of billions of Euros, and to destroy the whole economy of Cyprus, an EU and Eurozone member just to scare off several thousand Russians and Brits, or even Russian companies with state capital. We may live in a bizarre world, but I repeat – Russia wasn’t the reason.
If my hypothesis is true, this was a deliberate destruction of an already bankrupt Cypriot banking system, and hence, the entire economy. But what was the reason for this? I believe the idea was to show what will happen if South European countries give up austerity measures and de facto external management. Disastrous for Cyprus, this move is relatively less painful for Europe. Cyprus is an island with 800,000 people. It does not compare to Greece where a similar move would threaten political stability in the entire Balkans. It is even less comparable with Italy or Spain. Cypriots are unlikely to accept the ultimatum and external administration, because they will not gain anything from it. It is possible that preparations are underway for its withdrawal from the Eurozone. Possibly, more countries will have to follow suit.
However, the Eurozone is more likely to divide into two zones – Northern and Southern. The Northern Eurozone will have a strong Euro, common economic policy, mutual assistance, easy loans at the European Central Bank and other financial institutions. The Southern Zone will probably retain the Euro as a payment instrument, but without the right to issue it. Its members will even have to re-introduce their own currencies in parallel with it.
Russia actually had this kind of system before the 2000s, when the dollar and, to a lesser extent, the Euro were used on a par with the ruble. There may be many different options. I don’t want to go in for guesswork. The gist of my hypothesis is clear.
Crushing Cyprus may have been aimed at pushing some countries out of the Eurozone, or just to show what they are in for if they don’t follow the rules offered from the outside.
In advancing this hypothesis, I don’t mean to accuse Germany and its close allies of insensate imperialism. This may be the beginning of a tough fight for Europe’s preservation. It must be rescued. I would have acted exactly like the Germans, although I do feel sorry for the amiable Cypriots, Greeks, Spaniards, Portuguese and Italians. If there was no such plan, then this step was truly unprofessional and bordering on recklessness.
Now I’d like to say a few words about our policy. We shouldn’t take offense. If we and other Europeans had been consulted, the crisis would not have been so sudden and there would have been no hope of managing it.
Should we buy out Cyprus or its banks? It depends on the price and time. The prospects of local oil and gas deposits are still up in the air because of political and legal uncertainties. A relatively reliable banking system integrated in the global one was Cyprus’ main asset. Now it is gone, never to return. We won’t gain anything by interfering with the Germans. In fact, we’ll lose even more. Unilateral loans or the purchase of bank assets will simply be an insane waste of money and won’t help Cyprus, either.
If after the painful adaption to the new reality, during which we can and must render massive humanitarian aid to Cyprus, we want to buy what is left of its economy – the climate, beaches, hotels and deposits, they will cost many times less than the attempts to keep afloat a banking sector which is sinking and being sunk. After all, we are not to blame for the Cypriot crisis, and it is not worth saving semi-legal or even legal offshore companies with public funds, especially if the prospects of success are so bleak.
//Originally published  in Russia in  the federal edition of the Rossiyskaya Gazeta daily (N6040), March 26 , 2013.