David Frum


What the Eurozone Crisis is all About

Anders Aslund at the Peterson Institute is one of the world's leading experts on the collapse of the planned Soviet economy. If there is anybody who understands why socialism must fail, it is he. So please listen when he explains that the Eurozone crisis is a financial crisis, not a crisis of too much welfare, too much public spending, or too much debt:

Small countries with illiquid bond markets and limited GDP can easily face sharply rising bond yields or even lose access to international market financing. Latvia did so when its public debt was less than 20 percent of GDP in 2008, and Slovenia in 2012 when its public debt was about 50 percent of GDP. …

The Cyprus crisis resolution suggests an additional lesson. On the one hand, it is vital to maintain deposit insurance up to €100,000 to offer ordinary people an elementary sense of security. Otherwise, people (rightly) take to the streets. The larger deposits should not be treated as sacred, as has been the case in most of Europe. The order of claims is clear. Shareholder capital comes first, second come the bondholders, and third the large bank deposits. If the prices of various bank-related assets adjust accordingly, that is fine. The Lehman Brothers bankruptcy has led to an unwelcome tendency to bail out all banks. Given the high interest rates on Cypriot bank accounts, these deposits must be considered speculative and thus vulnerable as legitimate claims on failing banks. Only under extreme circumstances should states bail out banks.