The imposition of capital controls also sets a dangerous precedent for the eurozone, and will further spur savers to start moving their money out of banks in Europe’s weakest economies. Far from marking an end to the eurozone crisis, the harsh treatment meted out to Cyprus runs the risk of reigniting it on an unprecedented scale.
A third new precedent is the seizing of money from large numbers of investors from outside the eurozone — specifically Russians, who are thought to have around €25 billion ($32 billion) in Cypriot banks. Wealthy Russians have been stashing their money in Cyprus since the breakup of the Soviet Union, attracted by high interest rates, low taxes, and light regulation.
In a bid to justify the raid on deposits, eurozone officials and politicians in Germany, which as the eurozone’s most powerful economy effectively underwrites the single currency, have been muttering about Cyprus being a tax haven and dropping hints about money laundering. Yet such accusations are moot given that large parts of its banking sector are about to be wiped out. And whatever Cypriot banks have been up to, they were doing it back in 2004 when the country was allowed to join the European Union, and when it joined the euro four years later. Political considerations trumped economic ones then, as they always have in the drive towards “ever-closer union”; several countries have been admitted to the euro despite failing to meet the requisite economic benchmarks.
It’s understandable that Germany, which is ultimately on the hook for the bailouts provided to Cyprus and other countries, is reluctant to be seen as bailing out Russian tycoons, particularly with elections due in September. But the roughly six billion euros ($7.5bn) that Germany is insisting must come from depositors is pocket change next to the hundreds of billions spent on bailing out other countries, and an awfully small sum over which to risk the entire eurozone.
The euro was the pet project of Europe’s rich northern countries, in particular Germany and France, with the poorer southern nations brought along for the ride. The north needed markets for its exports, and the south was seduced by the promise of cheap and apparently limitless credit guaranteed by its economic betters, which fueled both property booms and growing entitlement states. Underpinning the whole enterprise was the dream of a European superstate to rival the U.S.
When things started to go wrong following the credit crunch of 2008, the southern countries found themselves trapped, unable to devalue their way back to competitiveness while they remained in the euro, but unwilling to leave for fear of the consequences. One after another, they’ve been forced to submit to punishing austerity and economic stagnation imposed by their new masters: EU and eurozone bureaucrats, and northern politicians.
But a revolt is brewing. Tapping into a growing sense that ordinary people have been betrayed by a political class that’s both incompetent and out of touch, anti-euro and populist parties have been gaining ground across the south, most recently in the Italian elections. If just one country finds the courage to leave the euro, there could be a stampede for the exit. (A “euroskeptic” party has even been launched in Germany, albeit with a very different motive: its supporters are tired of picking up the tab for what they view as profligate southerners.)
The future of the eurozone is far from guaranteed, and the inept and cynical way in which its political and financial elites have dealt with Cyprus may yet have an impact on the continent out of proportion to its tiny size.