Cyprus bailout: crazy and dangerous

ATMs emptied across Cyprus

ATMs were emptied across Cyprus yesterday: could this happen elsewhere?

You have to ask yourself, ‘Are these people bonkers?’  It certainly looks that way; the economists of the EU, European Central Bank and IMF who came up with the idea of relieving savers of up to 10% of their savings in Cypriot banks presumably regard themselves as rational beings. But this plan could have massive implications, politically as well as financially.

Until now it’s been a given that in tackling bank crises the savings of ordinary people should be protected – up to a high threshold of 100,000 euros in the European Union, for example. If there is a bailout, it’s the financial institutions which lent to banks by buying their bonds which should incur losses.  What is profoundly shocking about the Cyprus bailout is that it’s ordinary people who will see a portion of their savings snatched from them, without warning and not by a democratically agreed tax.  No party or politician would have dared, anyway, to suggest a tax of 10% on pensioners’ life savings.

It’s not just that confidence in European banks will be undermined (especially in Spain or Italy where potential bailouts loom), but that this will intensify what Mary Kaldor of the LSE calls – in a timely article on opendemocracy, ‘the new war in Europe’.  Kaldor argues that:

The European Union is a different kind of polity constructed in reaction to the risk of war and now, in reaction, to the risk of economic collapse. Economists argue that the monetary union was a big mistake in the absence of political union. But Beck points out that the point was just the opposite – to create a monetary union that would establish material interest in political union. Without a monetary union there would be no momentum for political union.

So far so good. But there is more to this story. In to-day’s Europe, economic and political logics are pulling in opposite directions. It is true that monetary union dictates the need for political union and everyone understands this at élite levels. But the consequences of monetary union and the neoliberal agenda with which it was associated is, at one and the same time, undermining what is known as the permissive consensus and greatly weakening the legitimacy of European élites and with that the European project.

She argues that the rules of the single market and the euro, along with associated neoliberal policies has led to increased inequality, insecurity and atomisation undermining community and cosmopolitan politics.  She concludes:

What Europe faces is a profound political crisis. This was the main conclusion of our report ‘The bubbling up of Subterranean Politics’. The protests and demonstrations, the new political initiatives and the new parties, are not necessarily a reaction to austerity. They were and are about a profound loss of trust in current political élites – a belief that these élites are locked into financial and media interests and unable to act on behalf of the public good, and a sense that representative democracy is no longer about participation, but about reproducing that élite.

The problem is that in the absence of a bottom-up emancipatory cosmopolitanism, a project of European solidarity, that lack of political trust can easily be manipulated by xenophobic, eurosceptic and exclusivist parties of various stripes. Parties like UKIP, the True Finns, the Dutch Freedom party, New Dawn and similar parties are making electoral inroads in nearly every European country. And the mainstream parties, preoccupied by short term electoral considerations, tend to pander to the sentiments expressed by these parties instead of voicing the longer term public interest.

The dangers for the cohesion of the European Union are clear to see in banner held by protesters outside the Cypriot parliament in Nicosia today.

People hold a banners outside the Cypriot parliament in Nicosia today

On the Londion Review of Books blog today, James Meek asks:

How is it that when real banks in Cyprus face actual financial collapse as a result of their conduct, it is not the banks themselves that suffer, nor the foolish rich who stashed their money there, but those savers of modest means who were promised their money was sacrosant?  Those who thought they were safe with the guarantee are now being hit with a tax of €6.75 for every hundred euros they have in savings, in order to save the banks that screwed them over. [...] Neither side, it seems, dare consider asking the big foreign financial institutions foolish enough to lend Cyprus banks €1.7 billion over the years if they would mind taking a loss on that investment.

What’s happening in Cyprus is not, at its heart, about a government failing to pay its way, but about banks failing to pay their way, and having to be rescued by government. If there is a government failing it is not that it spent beyond its means but that it allowed the banking sector to swell to grotesque, unsustainable proportions, like some obscure organ of the body that has bloated up until it can’t be removed without destroying the host, and all the resources of the body are consumed by the need to carry it. In Cyprus, the less well-off face a deposit tax to pay for the rescue of their banks by Europe and the IMF; in Britain, we continue to endure spending cuts, higher VAT and the hidden tax of a weakened currency as a consequence of a bank rescue carried out from our own resources. We rescue our banks; who will rescue us?

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5 thoughts on “Cyprus bailout: crazy and dangerous

  1. The situation in Cyprus ( and elsewhere) is tragic. It underlines again amongst other truths, that we cannot have it all today and pay for it tomorrow.
    It also shows us the enormity of inequality in the world and how none of the political systems have an answer. Philip Blonde has some interesting things to say in “Red Tory”,
    If a person has $2,200 dollars in total they are among the top 50% richest in the world.
    If you earned 15`000 dollars last year you are probably inn the worlds top 20% earners. If you have $61,000 dollars of asset’s( (in total) you are in the worlds richest 10%. Yet we all want more!!!!
    As a christian, I find that I am supposed to be part of the answer not the problem. Its a massive personal challenge. I wonder if everybody could adjust their incomes to redress the balance!!!!?

  2. It wasn’t too long ago that I thought that the people of America, at least those who took up this position, who so violently want to defend the 2nd Amendment which allows them, apparently, to bear arms just in case a rogue government should arise, were raving right wing lunatics. Now I’m not so sure. ‘Taking up arms against a sea of troubles’, does now not seem such an improbable idea or an outcome. Revolution indeed. I have no idea how I would react were such a proposal made here in England. Whatever the cause, to go into my bank account and strip it of any amount would to me be tantamount to just cause to indeed take up arms by some means or other. The thin end of the wedge indeed! I cannot believe someone would actually seriously propose doing that and imagining people would go along with it whatever the outcome or justification. Sounds like an idea Hitler would propose, quite frankly.

    I watched a programme a few months ago, it may have been a re-run. ‘Inside the Medieval Mind’ I believe it was called. An esteemed History professor was talking about ‘The Black Prince’, who went over into France to subjugate the rising tide England faced. He massacred 3 000 people in a town, men, women and children. French Knights took note and immediately claimed he spare their lives on the old ‘Knights agreements’ that had existed for many a long year and indeed their lives were spared, their social classes and standings were respected by the other side, whilst the innocent poor were slaughtered.

    The esteemed professor looked at the camera and said, ‘How little changes’, or words to that effect.

  3. I think James Meek on the LRB blog sums it up nicely. I guess the wealthy will find a way to wriggle out of paying leaving people with more modest savings to bear the brunt. How much will people continue to take lying down?

  4. “Unbelievable idea – Can you imagine this happening in this country? – no government would survive surely.”……

    Oh but in a sense it already has happened here, I was one of those people outside Northern Rock some years back to rescue my life savings. I was laughing at first, even mocking those lining up. What made me act was seeing Alastair Darling on TV telling everyone there was nothing to be worried about. That scared the hell out of me! The only reason the bank was rescued was precisely because it would have caused a run on all the banks

    Now lets look at the here and now and “a democratically agreed tax” .The government has helped itself to huge sums of money taken from hard working people. I am talking about the public sector workers whose pensions have been permanently damaged by the tory raid switching from RPI to CPI index, not content with limiting their pay rises to 1%. Then we have the whole raft of stealth taxes inc the ridiculous thieving APD which amounts to a tax on your holiday. Think about the pensioners whose savings have also been ruined by the 0.5% bank rate. The government makes a large sum of money available to banks so they can lend it out for businesses and home-buyers. So what do the banks do? They lend it back to each other, which means they dont need pensioners savings and so have no need to offer any eye catching savings rates so savings rates are actually still dropping!.

    The problems in Cyprus, the problems here are all the fault of politicos who are elected to serve Joe Public but who in fact serve their party first, then serve themselves. They all cosy up to big business inc Labour because many want to go off and earn big buck with these same large institutions when their MP days are over. We need a Boston Tea Party, a quiet peaceful revolution and a new way of living because capitalism seems to be coming to the end of its days…………

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