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.
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?
- Cyprus bailout: big implications in a small-scale rescue: Larry Elliott in today’s Guardian
- Cyprus: has the eurozone run out of road? Today on New Statesman blog