Austerity is spreading its ever darker shadow over Europe. It has now grown to such proportions that it is beginning to really scare members of Europe’s political elite. Among the deeply concerned are members of the French prime minister’s cabinet. This is big news that few seems to notice. One who does, though, is Ambrose Evans-Pritchard, sharp-eyed editor with The Telegraph:
French president Francois Hollande is facing an anti-austerity revolt from his own ministers as he pushes through a fresh round of tax rises and austerity to meet EU deficit targets. Three cabinet members have launched a joint push for a drastic policy change, warning that [spending] cuts have become self-defeating and are driving the country into a recessionary spiral.
And these are no small words coming out of the French cabinet:
“Its high time we opened a debate on these policies, which are leading the EU towards a debacle. If budget measures are killing growth, it is dangerous and absurd,” said industry minister Arnaud Montebourg. “What is the point of fiscal consolidation if the economy goes to the dogs. Budget discipline is one thing, cutting to death is another,” he said.
See I told you so. But where have the French been over the past five years when Greece has been sinking into the dungeon of austerity, mass unemployment, poverty, economic despair and political extremism? What did the French do to help Spain avoid bone-crushing austerity that has turned middle-class Spaniards into food scavengers? Did a single leading French socialist lift as much as an eyebrow when Portugal was almost torn apart by social unrest following EU-imposed austerity?
Evans-Pritchard does not bring up this European context, but his analysis of the French socialist austerity revolt is nevertheless worth listening to:
Mr Hollande will on Wednesday unveil another round of belt-tightening worth €12bn, even though Paris is already carrying out the harshest fiscal squeeze since the Second World War and France may already be in a triple-dip recession. The cuts are hard to reconcile with Mr Hollande’s campaign pledge last year to end austerity. They have set off furious criticism across the French Left. “Austerity is no longer tenable in Europe today with millions of unemployed,” said social economy minister Benoît Hamon.
So Mr. Hollande has shifted foot. His original plan was to “end austerity” by having government spend more, not less, while still raising taxes through the roof. That alternative does about as much damage down the road as austerity, especially if at the same time you are trying to balance the government budget.
And at the end of the day, the balanced budget is all that matters. It is the pillar upon which Germany has built its unrelenting campaign against “undisciplined” euro-zone members. The doctrine of the balanced budget was one of the cornerstones of the EU constitution – originally turned into constitutional mandate in Article 104c of the Maastricht Treaty of 1992 – and has since been elevated to religious doctrine. No one in Europe questions the economic logic in, so to speak, putting the balanced budget before the horse.
Not even the French who break ranks with the austerity-touting consensus. However, they actually don’t have to, because the nature of the austerity measures is such that it really does not deviate much from the standard European doctrine of maxing out the size of government:
Almost all the austerity measures will come from tax rises, pension fees and a “green’ levy, rather than spending cuts. The state sector will climb to a record 56.9pc of GDP this year as the economic contraction eats into the private sector. Public spending has reached Scandinavian levels … Critics say the French tax squeeze is not even helping to curb borrowing. France is at growing risk of a debt trap as the slump itself erodes tax revenues. Public debt will jump to 94pc of GDP next year, a drastic upward revision from 90.5pc.
Spending cuts would have made no real difference. Look at Greece, Portugal, Spain and Cyprus. The problem is the over-arching focus on balancing the budget in a recession.
Evidently, as Evans-Pritchard reports, the bad shape of the European economy, after years of unrelenting spending cuts and tax increases, is so bad that the political elite is beginning to panic:
A report prepared for EMU finance ministers over the weekend by the Breugel forum in Brussels said the eurozone’s crisis strategy is a failure, a nexus of confused policies that cut against each other. Fiscal overkill is stopping the banks returning to health, while foot-dragging on the EU bank union is perpetuating the credit crunch in the Club Med bloc. Sky-high unemployment is eroding job skills and “undermining Europe’s long-term growth potential”. Low growth is making it “much tougher for hard-hit economies in southern Europe to recover competititveness and regain control of their public finances”.
This is a good, first look at Europe’s deep structural problems. Austerity is not a structurally oriented policy, but it interacts with a lot of structural features of the European economy that, taken together, conspire to trap the economy in perpetual stagnation. One of those structural features is the system of excessively rigid labor laws. By interfering with the need of businesses to make flexible adjustments of their work force, Europe’s hire-and-fire laws significantly raise the cost of doing business, especially for smaller firms.
As a result, Europe’s work force is not working up to its potential. Tens of millions of workers get stuck in jobs that do not produce optimally, and tens of millions of others get stuck in unemployment. One symptom of this is low labor productivity, which the Breugel Forum notes in its report about Europe’s labor productivity:
Since 2007, the EU15 has taken a productivity holiday, while productivity has increased rapidly in the US (Figure 3). In terms of total factor productivity, both the EU15 and EU12 lag behind Japan. Even economically stronger countries, such as Germany, lag behind the US, and the evolution in the United Kingdom does not differ markedly from that of continental economies. Some hard-hit countries, such as Ireland, Spain and Latvia, have apparently recorded outstanding labour productivity performances since 2007, but most of these gains have been due to compositional changes, such as the shrinkage of low-productivity construction and low value-added services, and the total factor productivity developments in these countries were weak.
By making it excessively costly for businesses to downsize in tough times, Europe’s governments cause a phenomenon called “labor hoarding”, the effects of which the Breugel Forum report explain well:
Labour hoarding can partly explain the initial response to the shock of the recession. Employment contracted by five percent between 2007 and 2010 in the US, while in several European countries the employment shock was of limited magnitude. Public policies, such as Kurzarbeit, a scheme financed by the German government to support part-time work and keep workers employed, were one factor behind this response. Firms also hoarded labour, expecting a rebound and thereby limiting the initial rise in unemployment. Five years on, however, the productivity setback has become permanent, contributing to lower potential output. This cannot be regarded as a cyclical phenomenon anymore. In the short run, weak productivity performance can be related to insufficient demand through the so-called productivity cycle. But the weak cyclical position of the economy cannot explain sustained poor productivity.
It is good that some Europeans with access to the “big stage” are beginning to look deeper into what is really happening to the deeply troubled European economy. However, so long as they do not realize that the welfare state is the root cause of the problems, they will not be able to prescribe a medicine that could actually cure the patient.
The lack of insight into Europe’s ailment will drive the continent straight into the economic wasteland. As tepid as the American recovery is, it offers an infinitely better platform for the future than what the Old World could ever come up with.
Big, fiscally obese governments in Europe have a long history of over-taxing their citizens. The free-market verdict is in, and it says that Europe is in a state of perpetual stagnation, even decline, as a direct result of confiscatory taxation. Big government is turning Europe into an economic wasteland.
Unfortunately for Europe’s taxpayers, there is little to hope for in the future. One reason is of course the unanimous endorsement of the welfare state: so long as “conservatives” line up with “liberals” and socialists in defending the welfare state there will be no forward progress in terms of easing the burden on taxpayers. But the hard-line defense of big government goes beyond the tragic unanimity among Europe’s politicians – it even reaches beyond the borders of the EU.
One of the great fears of high-tax jurisdictions is the competition from low-tax jurisdictions. In the distorted international debate the latter have been labeled “tax havens” or “tax shelters” and associated with all sorts of disingenuous, sometimes outright false anti-low-tax propaganda. This only goes to show how afraid welfare-statists are of competition from countries and territories with lower taxes. This scare of low taxes shines through very brightly in this interview that Der Spiegel did with the European Union’s High Tax Commissioner, Algirdas Semeta:
SPIEGEL: The finance ministers of France, Germany, Italy, Spain and the United Kingdom want to step up the fight against tax evaders. In a letter, they announced a computerized exchange of information between their tax authorities. Would this help?
Semeta: If the five countries push for more ambitious information exchange, allowing all European Union member states to collect the taxes they are due, it would certainly be a positive thing. Automatic exchange of information has been our standard in the EU for years now, and the European Commission has been pushing to expand its scope to make the fight against tax evasion much stronger. With five of the largest member states also looking to achieve this same goal, we could expect good results. And I think the best way to achieve this now is to quickly adopt the large package of anti-evasion measures which the European Commission has put on the table.
First of all, the problem with tax evasion is the tax, not the evasion. Secondly, this is not directed against people unlawfully evade taxes, but against people who legally avoid taxes by adjusting their work and investments to pay as little in taxes as legally possible. What the large EU member states are doing now is to expand their own legal authority to stop any kind of planned, lawful avoidance of taxes.
In short: they want to make sure no one can, under any circumstances, find a way to legally reduce their tax burden.
The low-tax champions at the Center for Freedom and Prosperity recently published an article that reveals how the OECD – basically a cartel for high-tax countries – is gearing up for yet another assault on low-tax countries and territories. (The CFP is a great outfit, by the way. Support them!) This new push from the OECD to defend ailing, high-tax welfare states is hardly surprising – they have been at it for more than a decade – but it is nevertheless disturbing. It becomes even more troubling when it is coordinated with a similar campaign from the EU’s big member states.
Back to Der Spiegel, which asks High Tax Commissioner Semeta if this new campaign is finally going to break down banking privacy in smaller EU member states like Luxembourg and Austria:
Semeta: I can only welcome the readiness of Luxembourg to adopt the EU standard for greater transparency through automatic exchange of information. And Austria will certainly not want to remain isolated.
The tax tentacles of Europe’s greediest governments know no borders. Then Der Spiegel asks about FATCA and whether or not this is something Europe should copy:
SPIEGEL: The Americans not only have an automated system for sharing information between states, but they take measures such as forcing Swiss banks to cough up information about tax evaders. Is something like this also intended for Europe?
Semeta: The EU is the pioneer of the automatic exchange of information model, upon which the United States’ Foreign Account Tax Compliance Act … is based. As a result, we have very good structures and tools in place which we can use to exchange information with other countries, including those outside of the EU. In our negotiations with the US when FATCA was first conceived, we agreed that information will be exchanged between governments, rather than financial institutions. This is less costly for all parties involved. The other advantage of the agreement is that information flows are not a one-way street. With a combined approach in the EU and the US, we will suddenly see a vast expansion in the automatic exchange of information globally.
Here is what the Center for Freedom and Prosperity has to say about FATCA:
Directed at rich tax evaders — President Obama has claimed that there is $100 billion lost to tax evasion each year — FATCA actually hits middle-class, law-abiding Americans the hardest. The Joint Committee on Taxation estimated that the law would raise less than $1 billion per year in new revenue while inflicting high costs on both the global financial industry and the millions of Americans who live and work overseas. The European Banking Federation and the Institute of International Bankers place the total compliance cost for just the top 30 foreign banks at $7.5 billion. Many banks, faced with paying hundreds of millions of dollars in compliance costs, are opting instead to drop their American clients and abandon the U.S. market. Trillions of dollars are invested in the U.S. from foreign sources each year. If even a tiny fraction of that were to leave because of FATCA, the economic costs would easily surpass the limited revenues expected to be raised by the law. For besieged Americans living abroad, FATCA is a nightmare. Many expats have reported being turned away by local financial institutions. These ordinary workers often seek nothing more than a place to deposit their earnings, which Uncle Sam is making all but impossible — and they can forget about mortgages and pensions. As a consequence, the number of Americans renouncing their citizenship is growing steadily each year. This loss of talent is bad for America.
In short: a bad idea conceived to correct the errors caused by another bad idea, namely high taxes.
Clearly, though, the EU is moving in the direction of creating its own FATCA, or perhaps even worse. Der Spiegel again:
SPIEGEL: The European Savings Tax Directive, which is meant to regulate the taxation of savings across the EU, leaves many loopholes for tax evaders.
Semeta: The savings directive has many merits, but it is true that we identified important loopholes which were being exploited by tax evaders. Already in 2008, the Commission set about trying to close these loopholes and strengthen the EU rules. But, up until now, member states have not managed to agree on a revised directive, because Austria and Luxembourg have blocked efforts. Now that Luxembourg has changed its stance on bank secrecy, and with Austria hopefully soon to follow suit, I hope we will see the fast adoption of a stronger savings directive.
And, of course, the magazine has to finish off with the mandatory questions about “tax havens” like the British Virgin Islands or the Caymans – how hard, does the Spiegel ask, will the EU clamp down on the evil rich people who dare to move their money out of reach from our beloved confiscatory government?
Semeta: Last year, I put forward a new coordinated EU stance against tax havens, which would include a common definition, coordinated blacklisting and sanctions. If implemented by the member states, this approach could serve as a real deterrent to tax havens. I also suggested criminal sanctions for tax evaders. But for many EU countries that was going too far. I hope there will be a growing willingness to act.
Once again: the problem with tax evasion is the tax, not the evasion. And, once again, this is not about tax evasion, because tax evasion is already illegal. This is about tax avoidance through lawful tax planning. That is what the EU – and the U.S. government through FATCA – want to put an end to.
The one tiny question, though, is: what will these high-tax jurisdictions do when they have completely stopped their citizens from lawfully escaping their high taxes, and thereby totally stifled productive economic activity? What are they going to do when productive citizens simply refuse to earn high incomes or accumulate wealth?
Are they going to begin to force people to become wealthy, so they can confiscate the wealth?
If you want to know why Europe is becoming an economic wasteland with nothing but a life in industrial poverty to promise its youth, you need look no further than at the report on so called macroeconomic imbalances that the European Commission released on Wednesday (April 10).
The Commission, which is the de facto executive office of the EU, is the main culprit in destroying the economies of several euro-zone countries – what with wiping out one quarter of the Greek GDP – and its members are as ignorant about macroeconomics as the Soviet communists were about consumer choice.
Yet despite this the Commission has authored a report about the “prevention and correction of macroeconomic imbalances” that is full of pretense and completely void of substance. The gap between the two is called the degree of perbertility (the phrase coined from the name, Per Bertil, of the hands-down most incompetent college professor I ever had) and illustrates two things:
- The arrogance of the speaker – the more you think you know, relative to your actual knowledge, the more arrogant you are; and
- The potential harm that the speaker can do.
A college professor does harm in that he pretends to teach students things he does not know. But his negative influence usually stops at the doorstep of the classroom. A group of powerful politicians, on the other hand, can do enormous harm by exhibiting a high degree of perbertility.
The EU Commission hits a perbertile home run with its report on “macroeconomic imbalances”. Let’s listen to what these clowns have to say:
The on-going economic and financial crisis has prompted a profound restructuring of our economies.
I just love it when people use the term “restructuring of our economies”. It shows that they have absolutely no understanding of what the term “structure” means. It gets even better when the EU Commission is referring to some kind of restructuring that did allegedly take place as a result of a recession.
The structure of an economy is the relative size and significance of its components over time. If, e.g., 75 percent of all output in an economy is from the agrarian industry, then the economy has an agricultural structure. If most of the output is industrial, either in the form of manufacturing or in the form of high-end services (engineering, consulting, high-quality health care, banking and legal services), then obviously the economy has an industrial structure.
There is also a structural aspect to the role of government. A big government plays a different structural role than a small govenment. That role does not change over a recession – it changes over a period of time that is longer than at least two business cycles.
Now back to the clownocrats:
This [non-existent restructuring] needs to be accompanied by a new kind of economic governance in the EU that recognises the interdependence between our economies and which builds the foundations for future growth and competitiveness that will be smart, sustainable and inclusive. Correcting the problems of the past and putting the EU on a more sustainable development path for the future is a shared responsibility of the Member States and the EU Institutions, as our economies are closely intertwined.
From the perspective of the EU Commission this “shared responsibility” is like a marriage where the normal give-and-take between loving and respectful spouses has been replaced with one party’s “You give, I take” attitude. For the better part of the Great Recession the EU has been dictating to member states that they need to subject their economies and their citizens to ever tougher, ever more destructive austerity policies. When people have expressed their disagreement with the policies, the EU has doubled down and even forced democratically elected officials to step aside for appointed bureaucrats.
That’s the EU Commission’s definition of “shared responsibility”.
The perbertility fest continues:
In the decade leading up to the outbreak of the crisis, not enough attention was paid at the EU level to developments in the economies of individual Member States. This was due in part to an insufficient recognition of the spillover effects of economic policies pursued in one Member State on the economies of other Member States – spillover effects that were particularly acute in the euro area, due to the close economic interdependence of countries sharing a currency.
So now the Commission is trying to say that they had no idea that countries that share a currency union would be closely tied together! The currency union has existed for a decade and more, and the volume of research that preceded its inauguration was so big it could fill the entire cargo bed of a Ford F-150. (I know – I had all of it stored in my office for some time.) The three main points of that research was: economic integration, economic integration and economic integration.
And this research was not published now… ten years after the currency union went into effect. It was published in the 1990s.
Are we to believe that the EU Commission was totally ignorant of that research when the Great Recession opened up? If so, we can only draw one conclusion: they are all a bunch of fools whose feet are far too small for the shoes they are wearing.
Had enough? If not, here’s more:
But it was also in part due to the lack of tools at the disposal of the EU to help detect, prevent and where necessary correct such imbalances. As a result, imbalances were allowed to develop unchecked, with negative consequences both for the economies of several Member States and for the proper functioning of the Economic and Monetary Union. Drawing on the lessons of the past and determined to avoid repeating similar situations in the future, the EU has put in place a new system of economic governance.
This is how the Commission explains why it is treating its member states like French geese, force-feeding them a debilitating dose of austerity and using loans from the ECB as the “enticer”. If the member states are good and compliant and do as they are told by the Commission, there is a nice little check from the ECB on the way to them in the mail.
When the Commission says it has now “put in place a new system of economic governance”, this is exactly what they are referring to. To paraphrase The Godfather of Chicago, the EU Commission turned the economic crisis into an opportunity to expand its own power even more.
Cleverly, the Commission disguises its new power grab in some technical terms that shield its true content from probably 90 percent of all the people who even bother to read their report on “macroeconomic imbalances”:
As part of this new way of working, on a proposal of the Commission, the legislator set up a Macroeconomic Imbalances Procedure (MIP) to help detect, prevent and correct problems at an earlier stage. The MIP – together with the reinforced Stability and Growth Pact, with its focus on sustainable public finances – is at the heart of the EU’s strengthened economic governance.
So from now on the EU Commission has institutionalized its austerity measures in the “Macroeconomic Imbalances Procedure”. It is now de facto the law of the land, primarily in the euro zone but secondarily across the entire EU. The austerity measures that destroyed the lives of some 30 percent of all people in Greece, that has ravaged Spain to the brink of provincial secession, that nearly destroyed parliamentary democracy in Italy and is now tearing apart Portugal; these austerity measures, which the IMF have found to be essentially ineffective, have now become part of European law.
No elected legislator has had the chance to vote on, let alone review the law. Nowhere in Europe have people had the chance to cast an up-or-down vote on whether they would like to give such enormous power over their livelihood – their lives – to such a small group of people.
This is as far from democracy as you can get without putting marching boots on the streets. This is Eurotarianism on full display.
I could go on from here. I could comment on the absolutely ridiculous statements in this report about how “structural rigidities” are to be blamed for the persistent recession in some EU countries – when in reality it is the EU’s own war of austerity on prosperity that is turning the continent into an economic wasteland.
But I’ve said enough about the report already. Anyone who feels that they need more of the Commission’s perbertile nonsense can of course download a copy of the report and see for themselves. Just remember to continue to come back here, to The Liberty Bullhorn, for a healthy, daily dose of clarity, common sense and crisp economic analysis!
German magazine Der Spiegel has an interesting story about the current state of the European left. The story has broader implications than the magazine appears to realize – it is, in a sense, a prelude to an analysis of how Europe’s parliamentary democracy is in a state of degeneration. Decades ago, European elections were battles between ideologies; today, they are mere popularity contests between administrators of the welfare state.
More on that in a moment. First, let’s see what Der Spiegel has to say about the left. Using French President Hollande and German social-democrat leader Steinbruck as examples, the magazine makes the case that Europe’s left is having a hard time making itself relevant on the European political stage:
One year ago, the mood among Germany’s Social Democrats (SPD) was one of elated optimism. In May 2012, Socialist Party candidate François Hollande won the country’s presidential elections, opening up the possibility that a right-to-left changing of the guard might be possible in Germany too. Just weeks after his victory, Hollande invited the SPD leadership to Paris to allow them to bask in his popularity.
That popularity was short-lived…
On Friday, SPD chancellor candidate Peer Steinbrück is once again in Paris. But even as the general election campaign in Germany ahead of the vote this fall has begun to heat up, the mood on the Franco-German left has cooled. With Hollande’s public opinion poll scores plummeting, his country’s economy in trouble and his government mired in scandal, he looks to have very little sparkle left to lend to his cross-border political ally.
Here is one lesson to be learned: don’t promise to confiscate high-earning people’s money. But the other lesson runs much deeper and has much farther-reaching implications. When center-right governments in EU member states try to comply with the austerity measures imposed on them by the EU, they have to take the blame for the inevitably destructive results. Voters then turn to the left to find someone who will repair what austerity has broken. But due to the nature of the underlying problem – the inevitably unsustainable welfare state – the left cannot offer what voters expect. All they can do is put a different kind of band aid on big government’s bleeding wounds.
In terms of fiscal policy, this means that voters have the choice between the center-right approach to austerity, meaning government spending cuts combined with higher taxes, and the leftist approach, meaning government spending increases and much higher taxes.
Neither approach is good for the economy, which voters in, e.g., France are beginning to realize. Inevitably, this leaves voters disillusioned, which is what the European left is slowly beginning to feel.
Der Spiegel again:
Steinbrück’s campaign too seems to have reached an impasse. A new poll in Germany indicates that, were Germans able to vote directly for candidates (rather than for political parties), only one in four would cast their ballot for Steinbrück, against 60 percent for Chancellor Angela Merkel. Furthermore, only 32 percent approve of the job he is doing, his lowest such score since he entered federal politics in 2005, according to a survey released on Thursday evening by German public broadcaster ARD. Taken together, the travails facing the two politicians [Hollande and Steinbruck] amounts to a fading of hopes, particularly among euro-zone member states struggling under the ongoing euro crisis, that Hollande’s election would mark a resurgence of the European left — and an end to Merkel’s austerity-first approach to the common currency’s woes.
Right on the nail. The left has nothing to offer as an alternative. They want to preserve the welfare state even more than their center-right competitors, which means that they have to be even more destructive in their policies to defend it. In the end, voters see no difference between the two alternatives.
Case in point: it was the social democrat party in Sweden that in the ’90s implemented the most destructive austerity plan since the Weimar Republic. They cut away nine percent of GDP over three years, effectively injecting annual doses of a fiscal venom that until the current Greek crisis started was unsurpassed in terms of macroeconomic lethality.
Since then it is virtually impossible to distinguish between the center-right coalition currently governing Sweden and the social-democrat led leftist coalition. Voters looking for a break from austerity turn their backs on whoever is “the alternative”. For the most part that has been a center-right government in Europe over the past few years; when voters look at “the alternative” and see nothing but a bleak copy of what they are already stuck with, they see no reason to change team.
Der Spiegel elaborates on this point:
Steinbrück … said that a successful Hollande is in Germany’s interest so that the Franco-German partnership can once again take up its traditional role as the motor of Europe. But even the SPD has become concerned about identifying itself too closely with Hollande. … Steinbrück and his party are beginning to see Hollande more as a risk than a potential boon in the run up to the German vote. … Hollande himself appears to have had little luck in proving himself as an effective crisis manager. His administration has been unable to meet deficit reduction targets, many analysts believe that France could become the next euro-crisis hotspot and unemployment in the country has risen close to record levels in recent months.
The root cause of the left’s problem is actually not in their own domain. It has to do with the fact that Europe’s conservatives have abandoned the principles of limited government and individual and economic freedom. Instead they have adopted the welfare state and decided to save it at any cost.
It is worth noting that Germany’s conservative chancellor Angela Merkel is one of the leaders of the pan-European austerity crusade. Her goal is to save the welfare state. Her policy strategy is different in form from what the left wants, but at the end of the day the result is the same. It really would not have been better or worse for Greece to have raised taxes enough to both close the budget deficit and increase government spending.
The left created the welfare state. Despite such political giants as Margaret Thatcher, they won the ideological battle over it. The welfare state is still standing, and Europe’s conservatives have embraced it. Whether they did it for tactical purposes – in some welfare states half of the population can’t make it through the month without tax-paid entitlements – or because they have given up on conservatism is really not that relevant. What matters is that parliamentary democracy has gone through a process of degeneration. Thanks to the conservative capitulation at the altar of the welfare state, the choices in European elections have been decimated to selecting those for power whose policies to defend the welfare state will be least painful for the public.
Since the center-right seems to be better at that, the left is the victim of its own political victory.
After four years of austerity, with drastic government spending cuts and higher taxes, the euro zone countries should have been on a path back to prosperity by now.
That is, if austerity had been the right medicine.
It was not, though, and there is ample evidence to prove that, both empirically and analytically. Today we can add even more evidence to the pile: in the lastest study of unemployment, Eurostat reports that the euro-zone countries that have taken the hardest austerity beating exhibit the highest unemployment numbers. This is logical to anyone properly trained in economics, and it appeals to common sense. However, Europe’s political elite is apparently as baffled as your average Austrian economist. Euractiv reports:
Employment and Social Affairs Commissioner László Andor called new unemployment rates released by Eurostat yesterday (2 April) “unacceptable” and “a tragedy for Europe”. The eurozone has hit the 12% mark for job-seekers, compared to 7.7% in the USA.
The main reason why the United States does not have a higher unemployment rate is that we have yet to subject ourselves to fiscal torture, a.k.a., austerity. That said, unless Congress does something before the end of this year we are going to face a significant increase in taxes as Obamacare goes into full effect. That will undoubtedly cost us the fledgling recovery we are in now.
Back to Euractiv, which reports that the 12-percent level of unemployment in the euro zone is up from 10.9 percent a year ago:
In total, the number of job-seekers in February jumped to 19,071 million, almost two million more that the previous year. For the EU 27, the total number of unemployed stood at 26,338 million, more that two million more that in 2012. … “Such unacceptably high levels of unemployment are a tragedy for Europe and a signal of how serious a crisis some eurozone countries are now in. The EU and its member states have to mobilize all available instruments to create jobs and return to sustainable growth,” said Employment and Social Affairs Commissioner László Andor, as quoted by spokesperson Chantal Hugues.
This is typical hot air coming from a representative of the bureaucracy that has forced country after country into the dungeons of austerity. Greece has lost a quarter of its GDP in four years under the EU’s boots of an unforgiving combination of spending cuts and tax increases. Portugal has been brought to the brink of social unrest by similar policies, and some provinces in Spain are moving toward secession – again a result of reckless fiscal policies.
Now the same commission that authorized – not to say ordered – the jobs-destroying policies is demanding – and presumably soon ordering – more jobs to be created.
On one topic, though, the commissioner’s empty words do have a bit of substance. Euractiv again:
“Young people need more support to acquire the right skills to increase their chances of getting a job and finding vacancies that exist. This is why the Youth guarantee, agreed by EU ministers on 28 of February, must be put in place urgently,” Hugues added.
While a “youth guarantee” won’t create any jobs, the concern for the young is at least a sign that there is some sort of contact with reality in the Eurotarian hallways. Perhaps the good commissioner and his colleagues have seen enough of the surge in activity by the Nazis in Greece to realize what is about to happen in Europe?
The concern for the consequences of high youth unemployment is also reflected in an article in The EU Observer:
Unemployment among the under-25s is particularly high. More than one in two young people are without work in Greece (58.4%) and Spain (55.7%). In Portugal, it is 38.2 percent and in Italy 37.8 percent.
Europe is turning into an economic wasteland, right before our eyes. Years of increasingly invasive regulations and taxes, combined with a work-discouraging welfare state, laid the groundwork for economic stagnation. Then, as the Great Recession came sweeping across the world, deficits opened up in the government budgets of Europe’s over-bloated welfare states. In response, ill-informed and arrogant members of Europe’s authoritarian political elite – the Eurotarians for short – began demanding destructive austerity policies in return for deficit-funding grants and other forms of short-sighted support.
The price for this colossal economic mismanagement of an entire continent is now being paid by the young. The EU Observer again:
The high unemployment rates, particularly among the youth, have led politicians to increasingly speak of a “lost generation” with little prospect of finding work. “We are in a double dip recession. Unemployment is up, up and up. When is growth going to come?,” Bernadette Segol, the head of the European Trade Union Confederation asked recently.
A glimmer of hope, though:
She suggested the persistent focus on austerity measures is leading to “doubts” about the benefits of belonging to the European Union. The eurozone’s growth prospects also compare badly with other regions. While the 17-nation currency area economy is expected to contract by a further 0.3 percent this year, the US economy is expected to grow 1.7 percent in 2013. China’s GDP is growing at about 8 percent a year.
I would not take the Chinese number very seriously. There is still a lot of political inflation in growth numbers coming out of that country. The ruling communist party demands regional leaders to “produce” certain levels of growth year after year. If the regions don’t deliver, their leaders are punished. Therefore, in order to keep their jobs and remain in good standing with the rulers in Beijing, many regions simply report the growth rates that the commycrats want.
That said, the Chinese economy would only have to grow at two percent per year to do better than the European economy – in itself a fact that speaks volumes to the complete and utter disaster that is unfolding in the Old World.
And worst of it all is that it is entirely politically generated. A Godzilla-size government filled with over-paid, politically arrogant bureaucrats listened to Austrian economists who suggested that austerity was the way forward. From the deliberate destruction of economic activity would, the Austrians said, rise a phoenix of prosperity and jobs.
Of course, that would all happen in the long run.
Europe’s young are waiting to learn just how long that run is going to be.
Never bark at the big dog. The big dog is always right.
To begin with, I have said all the way that the European crisis is a welfare-state crisis, not a financial crisis. The blow to the banks from the financial-market problems of 2008 would never have caused the ripple effects it did, had it not been for the fact that banks in Europe had invested so heavily in government treasury bonds.
The banks thought – for obvious reasons – that those bonds were the safest investment they could make, that large investments in treasury bonds would provide them with a rock-solid low-risk platform for their portfolio management. But then the welfare states in Europe kept on spending on their entitlements, despite the fact that scores of taxpayers were either unemployed or earning fractions of what they would in a strong economy. They started having problems paying their creditors – i.e., the banks.
Low-risk treasury bonds became high-risk assets. Bank portfolios were totally upset, leaving them with much more of mid-to-high risk assets than was healthy for them.
Today the British news site The Commentator confirms my analysis, using Cyprus as an example:
When the European Union (with German money) mounted its most recent bailout of Greece, one of the conditions was a 75 percent write down of Greek government debt. For the Cypriot banks, which had made loans to the Greek government totalling 160 percent of Cyprus’s GDP, this was disastrous.
I was also right about the true purpose behind the Cyprus bank heist. Yesterday I explained that the plan to confiscate bank deposits was not going to be a one-time exceptional event, but was instead intended to set a new precedent for future bank-deposit confiscation raids:
Again, the two-fold goal of the Cyprus bank heist is to secure the euro zone as it is and to cause a long-term depreciation of the euro. In order to accomplish the latter, the Eurotarians have to create a certain, calculated level of capital flight from the euro zone. There are several ways to do this, but the instrument they have chosen – seizing bank deposits above a certain level – is devious enough to work. However, to cause a “right-sized” exodus you cannot limit the scheme to one country. You need others to follow.
British daily newspaper The Guardian has a story that confirms my analysis:
Fears that bank accounts could be raided in any future eurozone bailouts spooked markets on Monday, as Cypriots prepared for their banks to reopen for the first time in over a week on Thursday following a deal to secure a €10bn lifeline. Markets took fright after the head of the group of eurozone finance ministers indicated that the Cyprus rescue could be a template for similar situations.
And then the question is: what is a similar situation? Again, the Cyprus bank heist was not about taking deposits from individuals to rescue the banks where they had their money. The purpose was instead to take depositors’ money to give to government, which then used it to prop up ailing and failing banks.
The difference may seem like a technicality, but it is not. The fact that government is the middle man is crucial: it is right there that you find the precedent in this confiscation scheme. Government took money from large-balance accounts because it did not have enough cash for very important expenditures. Next time the very important expenditure does not have to be a bank, or even a financial institution. It could just as well be an urgently needed but financially strapped income-security system (Americans, think TANF or even Social Security).
The purpose behind the Cyprus bank heist was not primarily to save the banks – that could have been handled in a much different way by, e.g., the ECB printing another five billion euros – but instead to establish that government can raid the bank accounts of private citizens under the auspices of some kind of fiscal emergency.
It is not far-fetched to guess that many governments in small EU member states are now salivating over the opportunity to raid the bank accounts of their own wealthy citizens. The fact that the Cypriot government appears to be ready to take 40 percent above 100,000 euros makes this an even more attractive “revenue tool” for Europe’s cash-strapped welfare states.
It is this realization that is now setting in on investors all across the euro zone. The Guardian again:
[All] markets erased their early gains to close down on the day. The FTSE 100 index lost 0.2% and the German stock market fell 0.5%. Bank shares fell across Europe while the euro, which had nudged up through $1.30 initially, fell back to below $1.29. US markets, which had largely shrugged off the Cypriot problem, were also lower, with the Dow Jones Industrial Average down over 70 points, 0.5%.
The decline in Dow Jones is temporary, while the decline in Europe is the beginning of a permanent downward adjustment. Again: one of the ideas behind the Cyprus bank heist is to start a process that stokes fear in financial investors, resulting in a moderate outflow of funds from the euro zone. This will in turn cause a depreciation of the euro.
Germany needs this downward adjustment to compensate its export industries for the ridiculous shift to a much more expensive system for producing power.
Yes, politics can be that cynical. It is a risky strategy, but so is any high-end manipulation of the course of events, either in politics or in the economy.
In fact, if the Cyprus bank heist was repeated in a couple of more countries, it would give the desired financial outflow the boost that German leaders are calculating with.
And they may get exactly what they want. The Guardian again:
Malta’s finance minister wrote an article in the Malta Times expressing concern about what would happen if it encounters similar problems in the eurozone.
But this ill-intended, well-hatched plan also puts on full display the arrogance with which Europe’s political elite runs its new kingdom. They are either oblivious to, or dismissive of, the severity of the crisis that Europe has been stuck with for the better part of four years. This crisis only seems to get deeper and more entrenched for every move that this political elite makes. Der Spiegel has a good analysis:
It has been only four weeks since German Chancellor Angela Merkel had nothing but nice things to say about her “very esteemed” counterpart in Cyprus. In a telegram to newly elected President Nicos Anastasiades, she “warmly” congratulated him on his election victory and wrote that she looked forward to their “close and trusting cooperation.” That was then, as Merkel conceded last Friday in a speech to the parliamentary group of her center-right Christian Democratic Union (CDU) at the Reichstag in Berlin.
I could say something funny here about the fact that the German parliament is once again referred to as Reichstag – something about how it is easier to rule a continent by means of a common currency than by means of a common army. But let’s leave that aside. Back to Der Spiegel:
Although her intent was not to set an example, she said, Germany also would not “give in.” She added that there would be “no special treatment” for Cyprus. And over the weekend, she lived up to her word. … Since Cypriot parliament rejected the initial bailout plan, one crisis meeting followed the next in Berlin, Frankfurt and Brussels as concepts were presented, revised, rejected and resubmitted. In the end, the European Central Bank (ECB) imposed an ultimatum on the country. The message from ECB President Mario Draghi was that either Cyprus agree to the bailout conditions or it could be the first member of the euro zone to declare a national bankruptcy.
The technical meaning of that would be that Cyprus would have left the euro zone, reinstated its national currency and re-denominated all its debt in that new currency. Most analysts would contend that such a move would have led to a drastic depreciation which in turn would have caused foreign investors in Cypriot treasury bonds, as well as in private banks, to lose money.
However, there is a real possibility that the opposite would have happened: with Cyprus out of the euro zone the country could de facto have reinforced its position as a low-tax jurisdiction with high respect for bank privacy. That would have led to a new inflow of foreign money, and eventually the little nation could actually have come out more prosperous.
Now they are facing the exact opposite scenario, as Der Spiegel explains:
In the end, Nicosia agreed. The country’s oversized banking industry is to be radically downscaled, one of its biggest banks, Laiki, is going to be dissolved and those holding accounts there will see volumes over the €100,000 insured limit potentially vanish. A worsening economy will almost certainly be the result.
Not to mention the ramifications for the entire euro zone:
Smoldering and flaring for the last three years, the euro crisis has reached a new stage. For the first time, a parliament rebelled against the requirements of international creditors, and for the first time euro-zone taskmasters tried to take a slice of the savings of ordinary citizens, prompting people throughout the continent to wonder whether their money is still safe. The unprecedented showdown led many in Europe to speculate over the national character of the Cypriots, and wonder: Are they especially jaded, desperate or simply nuts? Finding the right answer was the perplexing task for leaders in Brussels, Paris and Berlin. How far can one bend to demands from a teetering country like Cyprus without losing one’s credibility?
Actually, the real question is: how far can the European political elite bend their member states before they start breaking apart – or breaking away from the common currency, and perhaps even the euro zone? The jury is still out on that question, but there is no doubt that the political elite that runs Europe completely lacks understanding of the art of government. They have eradicated hundreds of billions of euros worth of GDP in several EU member states, just to preserve their precious union and at the same time gradually centralize control over fiscal policy. They completely dismiss the will of voters, either as expressed in elections, in a referendum or in the form of parliamentary representation. Cyprus is only the latest example, and certainly won’t be the last.
They are Europe’s authoritarian leaders and deserve to be called Eurotarians. They rule with very little regard for the half-a-billion people whose tax money they live off. they use instruments of power, such as austerity policies, to close the ranks of member states and if necessary oppress public opinion.
These instruments of power have thus far allowed the elite to win and become seemingly stronger. But at the same time, each new victory they score erodes the very pillars upon which they build their power. Der Spiegel makes a good point on this:
But a monetary union, at its core, is not held together by budget figures or austerity programs, nor by the statements of finance ministers and the heads of central banks, no matter how well-received they are in the markets. The most important glue holding together a monetary union is the mutual confidence of its members, and that has declined drastically in recent months. While many in the north question the willingness of politicians in Rome and Athens to bring about reform, citizens in the south are increasingly furious over the austerity diktats from Berlin, Brussels and Frankfurt. There are predetermined breaking points all across the continent, but they are more apparent in Cyprus than anyplace else. … the debacle over the debt-ridden island nation is more than just another financial crisis along Europe’s southeastern edge. It is emblematic of the entire monetary union. If the euro zone collapses, it will be because of both its economic contradictions and its members’ inability to reach agreement.
In other words, the attempts at keeping the euro zone together, by means of austerity and anti-democratic thuggery, have created a backlash that will combine a persistent economic crisis with an accelerating democratic crisis. These two are now merging into a perfect storm of uncertainty, unemployment and deprivation. Italy offers a great example, as illustrated by this story from Corriere della Sera:
Time is running out for Italian industry. Business is in a “desperate” condition with companies “very close to the end”. This umpteenth warning came from Confindustria chair Giorgio Squinzi during talks with the mandated prime minister, Pier Luigi Bersani, in which Mr Squinzi appealed for a swift return to “a stable government”. Given the three million Italians out of work, with a spike of almost 40% for young people, Mr Squinzi pointed out that the employment issue “is becoming a tragedy”. Confindustria had no option but to be “extremely concerned about Italy’s real economy”, warned Mr Squinzi. The Confindustria leader said “intervention is needed with absolute priority”, starting with payment of the public sector’s outstanding debts to businesses and implementing what he described as a no-holds-barred “shock treatment” for the first hundred days of government.
In the recent election Italian voters responded negatively to the bone-crushing austerity measures forced upon the nation by the EU and the ECB. Their response created a stalemate in negotiations for a new prime minister and parliamentary majority, which in turn has led to a standstill in legislative activity. There is no identifiable course of fiscal policy, which means uncertainty as to taxes and government spending. (This includes the macroeconomically small but microeconomically important problem of government contractors not getting paid.)
This uncertainty, ultimately brought about by the relentless pressure from the EU and the ECB, is making life increasingly desperate for Italy’s businesses and citizens. The private sector’s faith in, and respect for, a parliamentary government will at some point start eroding. Once that process gains critical mass they will either leave the country in order to invest elsewhere…
…or support political forces that are much more hostile toward the EU than what we have seen thus far in Italy. We got a foretaste of what that means in the Greek election last summer.
It would be an exaggeration to say that the common currency and the European project of unity are unraveling. That said, though, there is no doubt that Europe is inching closer to the point where both the EU and the currency union start falling apart. The institutional uncertainty of the continent has increased, while the reasons to invest there have weakened significantly.
Therefore, I will say it again: If you have any investments in the euro zone, get the money out ASAP.
So the European political elite went ahead and did it. They forced Cyprus into seizing people’s bank deposits. They are taking 40 percent – yes, forty percent – of the deposits above 100,000 euros in one of the two largest banks and essentially wiping out deposits above the same level in the other.
This will effectively destroy the banking sector in Cyprus and cause a plunge in the nation’s GDP. Today we learn that this might have been the intention all along.
But it does not stop there. More euro-zone countries have already pledged to adopt this confiscation method, which means two things: 1) anyone with common sense and a fistful of dollars stashed away somewhere in the euro zone should pull his assets out right now; and 2) this is opening up to become a currency war between Europe and America.
More on these two points later. Let’s start with the actual deal that Cyprus was forced into accepting by the Eurotarians in Brussels, Frankfurt and Berlin. Bloomberg News reports:
Cyprus dodged a disorderly default and unprecedented exit from the euro by bowing to demands from creditors to shrink its banking system in exchange for 10 billion euros ($13 billion) of aid. Cypriot President Nicos Anastasiades agreed to shut the country’s second-largest bank under pressure from a German-led bloc in a night-time negotiating melodrama that threatened to rekindle the debt crisis and rattle markets.
They would never have kicked Cyprus out of the euro zone. Frankly I doubt that they could actually have done it, technically. This would be like the United States trying to force dollarized Latin American countries into using their own currency. But it would also have opened the opportunity for other euro-zone members to exit in order to save themselves from crippling austerity programs. A Greek exit would probably have been right around the corner, with Portugal presumably to follow.
The EU, the ECB and the German government would never have done everything to prevent this. Cyprus should have called their bluff.
The fact that they did not raises a certain number of more shadowy questions about under-the-table deals. But let’s leave those to the investigative reporters. Back now to Bloomberg, which reports that the plan to seize bank deposits was not something that the Eurotarians came up with as a last-minute solution. On the contrary:
Cyprus, the euro area’s third- smallest economy, is the fifth country to tap international aid since the crisis broke out in Greece in 2009. The first Cypriot accord, reached March 16, fell apart three days later when the parliament in Nicosia rejected a key plank, a tax on all bank accounts that sparked the indignation of smaller depositors.
This deposit confiscation scheme is now going to spread to other countries. More on that in a moment. Now for the real shocker in the deal:
The revised accord spares bank accounts below the insured limit of 100,000 euros. It imposes losses that two EU officials said would be no more than 40 percent on uninsured depositors at Bank of Cyprus Plc, the largest bank, which will take over the viable assets of Cyprus Popular Bank Pcl (CPB), the second biggest. Cyprus Popular Bank, 84 percent owned by the government, will be wound down. Those who will be largely wiped out include uninsured depositors and bondholders, including senior creditors. Senior bondholders will also contribute to the recapitalization of Bank of Cyprus.
So there you have it. Confiscation at the 40-percent level, elimination of some deposits and a virtual destruction of the Cypriot banking industry. Which, again, was apparently part of the purpose all along:
The squeezed banking industry will likely lead to a “sharp drop” in Cyprus’s gross domestic product this year and next, according to Reinhard Cluse, a London-based economist at UBS AG. As a result, the euro group’s debt-to-GDP ratio target of 100 percent by 2020 “must be doubted,” he said. The Cypriot Finance Ministry said in a January presentation that bailing out the country may push debt to a peak of about 140 percent of GDP next year.
The debt ratio is no longer the primary issue for Europe’s political leaders. Their goal is to maintain the euro zone as it is and to open up a currency war on the United States. Thre currency war is unequivocally at the request of the Germans, whose manufacturing industry is stagnant while their competitors in the United States are doing reasonably well.
In order to keep the euro zone together and create a currency war the Germans and the EU-ECB leaders are willing to once again trample upon the very livelihood of European citizens. Just as the UBS economist says, the wiping out of the Cypriot banking industry will severely affect the Cypriot economy. But we know from before that the Eurotarians have no problems destroying the economy of an EU member state to get what they want. They wiped out a quarter of the Greek economy in four short years and they forced Portugal into austerity measures that have shrunk their economy so it is no bigger today than it was a decade ago.
Again, the two-fold goal of the Cyprus bank heist is to secure the euro zone as it is and to cause a long-term depreciation of the euro. In order to accomplish the latter, the Eurotarians have to create a certain, calculated level of capital flight from the euro zone. There are several ways to do this, but the instrument they have chosen – seizing bank deposits above a certain level – is devious enough to work. However, to cause a “right-sized” exodus you cannot limit the scheme to one country. You need others to follow. Alas, EUBusiness.com reports:
Three small eurozone countries — Finland, Estonia and Ireland — said Sunday the private sector ought to be involved in future financial rescue packages for member states. “There must be some private sector involvement,” Irish Minister of State for European Affairs Lucinda Creighton said on the sidelines of an informal retreat in Finnish Lapland on the future of Europe. Finland, which hosted the two-day meeting of European leaders in Saariselkaeae, said the proposed Cyprus rescue package marked a departure from previous packages. … “We are moving from a system of bail-out to a system where we decouple the connection between the bank and the sovereign. We are going towards a system of bail-in,” Finnish European Affairs Minister Alexander Stubb said. Under a bail-in, creditors share the burden by forfeiting part of their investment to help rescue a bank.
Now, let’s be apprehensive of the details in this. The Cyprus bank heist was not about saving the banks per se. It was about getting revenue for the government from a new source. In other words, the deposit confiscation is a one-time tax that replaces other taxes, such as a temporary increase in income, property or consumption-based taxes.
As a source of revenue for government, the deposit confiscation can serve to finance any spending need the government might think it has. That it is tied to a bank bailout is of less importance, though not insignificant. It is easy to sell this tax to the public if it is tied directly to a bank bailout; however, once people have seen this “tax” be used once, they are also willing to accept it for other, supposedly equally urgent measures – such as to close a large government budget deficit.
Neither Finland nor Estonia have any urgent problems in their banks, yet their governments are eager to endorse bank-deposit confiscation as effectively a kind of “emergency tax”.
Expect other euro-zone countries to endorse this egregious violation of private property rights. Once enough of them have done so, and one or two more countries have used it (hello, Portugal and Spain?) there will be a momentum of fear among investors in the euro zone, enough to propel a certain amount of money to leave. This is a risky game, of course, because the drainage could be so large that it affects the viability of the banking industry in the euro zone. However, I doubt that this is of any concern in Eurotarian circles: they have taken enormous risks already to get what they want; the game they played with Cyprus about expelling them from the euro zone was just the latest example.
A sizable flow of money out of the euro zone would cause the euro to depreciate, especially vs. the U.S. dollar. This way the Germans can de facto use the currency of the euro zone to neutralize the cost of their own ridiculous restructuring of their energy sector in a “renewable” direction.
Political cynicism at the highest level. Unfortunately, it looks like the Eurotarians are getting away with it, especially since they are being supported by so called “non-government organizations”. These NGOs are helping castigate Cyprus as a nation that deserves to be hammered like this. After all, Cyprus has committed two evils: they are a haven for off-shore banking and they are a low-tax jurisdiction.
Cardinal sins in the eyes of some. Behold a second story from EUBusiness.com:
In the heat of a crisis which has left it on the brink of bankruptcy, NGOs have accused Cyprus of a host of economic wrongdoings — as a tax haven, a hub for money laundering, and of financial opacity.
How about that… financial opacity. Don’t you just love it when statists invent new, fancy terms for the same old hate-the-rich ideology?
French Finance Minister Pierre Moscovici has spoken of excessive expansion and lending in the financial sector of an overbanked country. He put the total capital of the banking sector at seven times gross domestic product, with deposits paying annual interest rates of 5-6 percent, with non-residents — especially Russians — accounting for a large portion. According to a study by the Institute of International Finance (IIF), a banking lobby group, non-residents accounted for 20 billion euros ($25.8 billion) of deposits, out of a total of 52.2 billion euros in Cypriot banks. Citing figures from the European Central Bank, the IIF said 85 percent of those non-resident deposits came from clients outside the European Union, in particular Russia, Ukraine and Lebanon. Other countries, chiefly Germany, suspect Cyprus of having turned a blind eye to money laundering, with an independent European audit lined up to verify.
So the uniquely vicious assault on the Cypriot economy also serves the purpose of bringing a low-tax jurisdiction to its knees. Such jurisdictions pose a threat to high-tax welfare states who do not want their taxpayers to have a better alternative than to stay at home. Once the high-tax jurisdictions, led by Germany, have subjugated Cyprus, others will hesitate to use low taxes to compete for foreign investments. Otherwise, countries like Greece, Ireland and even Italy – not to mention possible breakaway provinces like Scotland and Catalonia – could do just that in order to kick start their economies.
Shutting town the “tax haven” of Cyprus is therefore an ancillary benefit to the Eurotarians.
It is going to be a turbulent spring in Europe. Let’s hope we can keep its fallout away from our shores. And whatever you do – get your money out of the euro zone!
I had planned an article on emerging austerity measures in Canada, but the unprecedented drama on Cyprus calls for a return to Nicosia. You can blame it all on the European Central Bank. The EU Observer has the story:
Cyprus is on the brink of bankruptcy and of becoming the first-ever country to leave the euro after the European Central Bank (ECB) issued an ultimatum on Thursday (21 March). In its statement, the ECB warned that it would turn off the tap of emergency funding to Cyprus’ banks on Monday if a rescue package is not agreed. Removing Cyprus’ emergency support could see the country’s two largest banks, Bank of Cyprus and Laiki, collapse within days.
This is pure-bred authoritarianism. But as I explained before, no one should be surprised that the Eurocrats – who from now on shall be known as Eurotarians - would take it to this level. They crushed the Greek economy and turned the Mediterranean nation into a wasteland of industrial poverty. They have brought Portugal to a simmer of social unrest, provoked a surge of separatism that could ultimately cause Spain to break apart, and they almost eradicated parliamentary democracy in Italy.
All to make the point that they, not the nation states, run economic policy. If the EU and the ECB want austerity in a euro-zone country, then that country’s government better do exactly as they are told, or face the wrath of the Eurotarians.
The government of Cyprus is now learning first hand what this wrath means in all its ugly practice. The threat from the ECB to expel Cyprus from the euro zone is as nasty as it could be. Here is how it works:
1. The ECB wants the Cypriot government to seize up to ten percent of people’s bank deposits – the average “haircut” seems to be about eight percent.
2. If the Cypriot government refuses to comply, which they have done thus far, bank customers will in theory get to keep their deposits intact. However, in return for their non-compliance the Cypriot government will lose the ECB funds that would continue to keep the major banks in Cyprus at acceptable levels of liquidity.
3. To avoid bank defaults, Cyprus has turned to Russia for emergency loans. This would allow them to keep their banks afloat while avoiding a deposit confiscation.
4. The contacts between Nicosia and Moscow infuriated the Eurotarians in the EU and the ECB. Cyprus has all of a sudden showed that the ECB is not the only circus in town. But instead of sitting down, negotiating and recognizing Cyprus as a business partner, the ECB slams a nuclear bomb on the table and demands full and unabridged submission from Nicosia.
5. The ECB’s threat to kick Cyprus out of the euro zone is diabolic. It would force the Cypriots to reinstate their national currency, a move that would come with great currency risks. The ECB is calculating that the uncertainty of a currency change and the potential losses would be a more bitter pill to swallow for bank clients and lawmakers in Cyprus than the confiscation of deposits.
At the end of the day – that would be Monday – I don’t think the ECB is going to act on its threat to hurl Cyprus out of the euro zone. As the EU Observer story reports, others agree:
Carston Brezki, senior economist at ING, described the ECB’s move as a “gun at the head of Cyprus.” But he expressed doubt if the ECB would really switch off Cyprus’ financial life support. “It is hard to imagine that the ECB would really be willing to be the one to pull the trigger,” he noted.
It is going to be a close call, because both Mr. Brezki and I are probably under-estimating the complete arrogance that has engulfed the ECB executive offices. Nevertheless, the threat is going to have tangible effects, one being that the Cypriot government is working overtime to find an alternative to bank-deposit confiscation. EU Observer again:
The Cypriot government of president Nicos Anastasiades is now scrambling for a Plan B to put to the eurozone, involving alternative ways to raise the €6 billion contribution on which the eurozone’s €10 billion bailout package is conditioned. Using the island’s natural gas reserves, pension funds or state-owned assets as collateral have all been mooted as possible means to raise the cash. A set of bills were tabled yesterday in Nicosia, including plans to create a state investment fund to raise Cyprus’ contribution. The Cypriot parliament is also expected to vote on legislation to impose capital controls restricting the amount of money customers can take out of their bank accounts when, or if, they reopen next week. … Meanwhile, finance minister Michalis Saris will remain in Moscow for a third day of talks with Anton Siluanov, his Russian counterpart.
If the Cypriots call the ECB’s bluff they may still make a deal with the Russians. It would give them the “best” combination of two options: they get to stay in the euro zone, which makes them attractive for offshore investors from Russia. Currently, Russians own 23 percent of all bank deposits in Cyprus, a share that could easily grow with more deals between Nicosia and Moscow. At the same time, a loan from Russia to replace ECB funds would get Cyprus out from under the austerity boot that is currently hanging like a dark, ominous cloud over the island, just above the even darker, even more ominous threat of bank-deposit confiscations. A Russian loan would clear the Cypriot skies completely.
The big question is, again, how delusionally arrogant the Eurotarians at the ECB actually turn out to be. Again, I doubt they will force Cyprus out of the euro zone – somewhere, someone within the inner circles of the EU should know that some countries would actually like to leave the euro zone. They should be able to tell the ECB that a Cyprus exit would embolden euro-skeptics in, e.g., Greece, Spain and Italy.
Then again, allowing Cyprus to stay in without implementing the plan to seize bank deposits has its own consequences for the Eurotarians. It would show that they are, at least to some degree, a bunch of paper tigers. It would also stop the first test run of this new form of tax: as I explained a couple of days ago, the plan to seize bank deposits has widespread support among euro-zone governments. The reason for this is that they see it as a new form of taxation, and they need a live-size test run, an example they can refer to and say “it’s been done before, don’t worry, it didn’t hurt people in Cyprus, just lay still and allow us to take a few pints of your blood”.
One thing is clear, though. With its threat to kick Cyprus out for not seizing bank deposits, the ECB has put its fangs of totalitarianism on full display. From now on, nobody should be in any doubt that the entire EU project, as Nigel Farage says, is fundamentally anti-democratic.
I usually do not spend more than at the most two articles on the same subject, but the plan to seize bank deposits in Cyprus is such a pivotal moment in Europe’s political and economic crisis that it merits one last piece. In fact, this story from Reuters puts an important perspective on the crisis, a perspective that hints at what the true, long-term impact of this disastrous plan could actually turn out to be:
Cyprus pleaded for a new loan from Russia on Wednesday to avert a financial meltdown, after the island’s parliament rejected the terms of a bailout from the EU, raising the risk of default and a bank crash. Cypriot Finance Minister Michael Sarris said he had not reached a deal at a first meeting with his Russian counterpart Anton Siluanov in Moscow, but talks there would continue. Russia’s finance ministry said Nicosia had sought a further 5 billion euros, on top of a five-year extension and lower interest on an existing 2.5 billion euro loan. Cyprus is seeking Moscow’s help after parliament voted down the euro zone’s plan for a 10 billion euro bailout on Tuesday.
There are two reasons why they are turning to Moscow for help. Russians own 23 percent of all bank deposits in Cyprus, and most of their deposits are quite large. This benefits both parties: the Cypriots have been able to built a little bit of an offshore banking industry, which in turn has helped elevate the nation’s notoriously poor per-capita income scores; the Russians, in turn, get a quick and easy entryway into the EU, where they can buy upscale vacation homes and in general live a lavish lifestyle.
The second reason for the Cypriot government to turn to Russia is that the leaders in Moscow don’t give a fly’s fart about austerity. The people in the nation of Cyprus are of Greek descent – the island is technically divided with the north-east part being a deplorably poor Turkish province – and they know very well what the EU has done to Greece. They do not want the same treatment.
Closer financial ties between Nicosia and Moscow is, of course, not exactly what the Eurocrats in Brussels would want. Reuters again:
The European Central Bank’s chief negotiator on Cyprus, Joerg Asmussen, said the ECB would have to pull the plug on Cypriot banks unless the country took a bailout quickly. “We can provide emergency liquidity only to solvent banks and… the solvency of Cypriot banks cannot be assumed if an aid program is not agreed on soon, which would allow for a quick recapitalization of the banking sector,” Asmussen told German weekly Die Zeit in an interview conducted on Tuesday evening.
What he really meant to say is that the solvency of the banks can only be guaranteed if the government takes eight percent or so of what people have deposited into the banks. That is, after all, what the EU-ECB bank grab plan says. In other words, drain the banks for some of the money they can use to issue loans and make money, and the banks will be better off.
Makes perfect sense. Eurocrat sense.
As does this hollow threat from another European politician, as reported by Reuters:
Austrian Chancellor Werner Faymann said he could not rule out Cyprus leaving the euro zone, although he hoped its leaders would find a solution for it to stay.
Complete nonsense. The EU and the ECB have wreaked havoc with their destructive austerity policies on country after country to keep the euro zone together. They have hurled Greece into a full-fledged depression and pushed its parliament to the brink of fascism just so they could make sure the Greeks were not going to give up on the euro. They have turned middle-class Spaniards into food scavengers to guarantee that Madrid would not re-introduce the peseta. They have effectively neutralized parliamentary democracy in Italy and reduced Portugal to a whirlpool of social turmoil – all in the name of the common currency.
There is no chance that they will kick Cyprus out of the euro for going to Russia for loans. The Eurocracy may be arrogant enough to ignore the will of the European voter when it comes to fiscal policy, but they are smart enough to know that the euro is unpopular even among national leaders in Europe, and if they allow one country to slip out of the euro zone – for whatever reason – it will open for more countries to follow.
That is not to say that the EU won’t try to punish Cyprus. But they really do not have that many ways of doing it. The EU is a burden on most countries, though Cyprus is one of the net takers of EU funds. In theory, the EU could reduce or terminate parts of the grants they hand out to Nicosia. In practice, though, that would be politically very dangerous, as it would spark stronger anti-EU sentiments in many countries. National leaders would in all likelihood voice their strong opposition, especially the British government which is being pressured by a surging UKIP to sever ties with Brussels.
What we do know, though, is that there will be some kind of reaction from Brussels, and that it will probably be of the knee-jerk type. Reuters reminds us that:
The EU has a track record of pressing smaller countries to vote again until they achieve the desired outcome.
The difference is that no other country has had such comparatively convenient access to alternative credit as Cyprus has.
We won’t know the full fallout of the bank-grab scheme for some time. But there is no doubt that this story will have consequences for the entire European Union, not just the euro zone. And it will be worth following.
The decision to start confiscating bank deposits in Cyprus was not something that Europe’s political leadership came up with on a whim. It’s been long in the making, part of a carefully laid-out plan.
Those who believe that Cyprus was only the start appear to be right.
More on that in a moment. First, let us put this decision in its proper context. The leaders of the EU and the ECB – and the finance ministers of the euro zone – were all in on this deposit confiscation deal, and the idea very likely saw the light of day in the EU leadership. This is important, because it helps us understand whether or not this is indeed something that the EU will implement in more countries than just Cyprus.
The Eurocrats within the EU and the ECB have been trampling on the people of Europe for several years now. They have gotten high on their own political arrogance after having forced Greece into submission and years of bone-crushing austerity. They have put country after country under their authoritarian policies, apparently believing that they could continue to rule Europe at their own discretion.
If you can eradicate one quarter of the GDP in Greece and still subject tens of millions of other Europeans to the same anti-democratic, fiscally torturous policies, then why should the confiscation of people’s bank deposits present you with any more than minor white noise of protests?
The problem for the Eurocrats is that this might have been the worst possible thing to do at the worst possible point in time. It is one thing to tax people to death on their income, and to put heavy weights of value-added taxes on their spending. It is an entirely different thing to start going after what people have managed to set aside for themselves and their families – out of money that government has already taxed both one or two times.
A savings account is one of the few remaining sources of personal pride that citizens in Europe’s fiscally oppressive welfare states have left. Not to mention the fact that for many millions of middle-class families all over Europe, the money they have in the bank is a critical life line in tough economic times. Since these are tough economic times, they really do need to be able to rely on those savings.
Add to this that welfare state after welfare state in Europe has begun defaulting on their spending promises, cutting down on entitlements of all kinds, from unemployment benefits to college tuition assistance to subsidies for pharmaceutical products – and we have a full, sharp and chilling picture of why the Cypriot bank-deposit confiscation comes at exactly the wrong time.
Precisely because this looks small compared to years of austerity, at least from the viewpoint of someone up in the EU ivory tower, I highly doubt that the Eurocrats understand the depth of fear that their plan to seize bank deposits has stoked in Europe’s middle class. I also doubt that they will realize what the political fallout from this will be. If anything could cause the EU to unravel, it would be a widespread application of this kind of organized theft of people’s property.
However, we might never get that far. While the people’s will is little more than the irritating sound of a mosquito in the ears of the Eurocracy, the reaction on the financial markets might actually cause them to rethink their plan, or at least limit its application to one country. Consider this good analysis from Stefan Kaiser at Der Spiegel:
The shock waves of the Cyprus bailout deal hit financial markets on Monday, as anger spread over a one-time levy on bank deposits on the small island at the fringe of the euro zone. This marks the first time since the start of the European sovereign debt crisis that average savers are being forced to help rescue a country’s finances alongside taxpayers, investors and private creditors.
And this after years of higher taxes and government spending cuts that, each time they were introduced, were sold to the public as “the” solution to the current crisis. And just like each round of austerity proved to be just a prelude to the next one, people in Europe now have good reasons to ask themselves where this bank-deposit confiscation scheme will strike next.
According to Kaiser and Der Spiegel, investors on the financial markets have already made up their mind:
Financial markets reacted nervously, as share prices of banks across Europe dropped. Monday’s biggest losers were financial institutions in countries hardest hit by the debt crisis, like Spain’s Bankia, whose stock temporarily slipped by more than 8 percent. Deutsche Bank was also not immune, losing 4 percent of its stock price. Investors appeared to be fleeing to assets perceived to be safer, like German bonds or gold.
Then Der Spiegel reveals the true depth of support among Europe’s political leadership for the confiscation scheme:
It looks as if the deal struck by euro-zone finance ministers in Brussels over the weekend is already in doubt as a result of massive uncertainty among the public and on the finance markets. Several news agencies have reported that the terms of the deal were to be renegotiated on Monday. Proposals include lowering the levy on bank deposits below €100,000 ($129,000) to 3 percent from 6.75 percent, and potentially increasing the forced contributions of deposits above €500,000 to 12.5 or 15 percent, up from 9.9 percent.
In other words: all the finance ministers of the euro zone were in on this deal. This means that the plan to seize bank deposits has been in the making for quite some time. It is therefore not a desperate measure aimed at simply saving Cyprus, but something that will become a regular part of the European policy tool box for grabbing more money whenever government needs it.
This, in turn, means that the Eurocracy has been planning to do this for a long time – and as we know by now, whenever the Eurocracy decides to do something, they will stick with it regardless of the consequences. You don’t need to look further than to Greece where the persistence of the Eurocracy to force austerity down the throat of the Greek people has now cost that nation one quarter of its GDP.
That tells us quite a bit of what they are willing to do in terms of trampling on public protests in order to get their will; if they can basically transform an EU member state into a complete economic wasteland and throw half of all the young in that country into unemployment and economic despair, then why would they worry when their plans to seize bank deposits draws flak in the media?
Their determination to stay the course is put on full display in how they are considering a re-arrangement of the confiscation rates. By suggesting to take more from large deposits and less from small deposits they are playing the same despicable class-warfare tones as the left always uses when it wants to go after private property.
Then Stefan Kaiser at Der Spiegel reminds us that there is actually a precedent to this deposit confiscation:
In the case of Greece’s second loan program in 2011, private investors were called on to take part for the first time. German Chancellor Angela Merkel insisted that such action would remain unique to that program.
This was when the Greek government declared that it would write down what it owed them. Backed by the EU, the ECB and the IMF they basically unilaterally seized a portion of the money people had lent them by buying their treasury bonds.
It was, in some way, possible for them to get away with that scheme since the bond buyers had technically deposited their money with the government. The Cypriot bank-deposit confiscation plan is different in that those who have the deposits have given their money to another private entity, a bank. Even with the Greek debt writedown in mind you would expect private-to-private transactions to be safer.
Not so, alas, which explains why this is becoming such a toxic political issue. In fact, it is becoming so toxic that the leaders in Europe who concocted the scheme are now trying to pass the blame to someone else. From the EU Observer:
German finance minister Wolfgang Schaeuble and European Central Bank board member Joerg Asmussen during parallel events in Berlin on Monday (18 March) tried to blame each other for an unprecedented eurozone bailout deal demanding small savers in Cyprus to take losses on their bank deposits. “The levy on deposits under €100,000 was not an invention of the German government,” Schaeuble said during a conference on taxation. He insisted that the “configuration” he and the International Monetary Fund were defending was to tax only deposits above €100,000 – to a much higher rate than what was finally agreed. “The figures we have come up with are at the lower limit. If another configuration was chosen, touching only deposits above €100,000, the result would have been different and we would not have had these problems,” Schaeuble said.
The last statement is startling. Apparently, Mr. Schäuble seems to believe that all he and the Eurocracy need in order to get away with their deposit confiscation is a little bit of class-warfare rhetoric.
But his statement also reveals the utter contempt that he and others in Europe’s power-hungry political elite have acquired for the rule of law. This contempt is extremely dangerous, because it opens the floodgates of completely unabridged government power. It is very easy to transition from today’s policy paradigm where private property rights are worth defending only insofar as they produce taxable economic activity, to a paradigm where property rights are not even given such scant recognition.
America can learn a lot from this moment in Europe’s downward spiral. One lesson is that when a welfare state finally plunges into a deep crisis, no rules apply anymore. When government has brought the private sector to its knees in its desperate attempt to save the welfare state, then the distance between the welfare state and the totalitarian state will be so short that no one can see the difference anymore.