Cyprus on Fire? Blame the German Bullies
Daniel Gross on the euro zone’s cruel and unusual punishment.
Over the weekend, the country seemed poised to grab a chunk of every bank depositors’ account to help fund a bailout from the European Union and the IMF. Cypriots, not surprisingly, reacted with fury. On Tuesday, the country’s Parliament rejected the measure, and the finance minister resigned—except his resignation wasn’t accepted. In a scene out of what may be Nicolas Cage’s next movie, England sent a military plane loaded with one million euros in cash to dispense to U.K. military personnel on the island. Russians, whose deposits helped Cyprus’s formerly Lilliputian banking system to swell to Brobdingnagian proportions, flew south to visit their money.
There are so many culprits to blame for Cyprus’s fiscal disorder: Cypriot bankers and government officials, Russian depositors, European banking regulators, and Greece. (Cyprus banks are suffering in part because they own a lot of now-devalued Greek government debt and because they made loans to Greek companies.) But in casting blame, we shouldn’t hesitate to look north as well.
For much of the past century, if something was on fire and totally messed up in Europe, blaming Germany was a pretty solid bet: World War I, the 1930s, World War II, the 1968 Olympics.
The European crisis, which started in 2008, has lingered, festered, and metastasized for five years without resolution: Greece, Ireland, Portugal, Spain, Italy, and now Cyprus. Throughout, Germany has used its immense influence at the European Central Bank and the European Commission to inflict its worldview on its junior partners in the euro zone. German Chancellor Angela Merkel, who runs the biggest and healthiest economy in the union, effectively has a veto on any measure taken to aid a struggling European peer. And as any reader of Paul Krugman knows, these efforts have been chronically slow, late, and ineffective. When the authorities finally do intervene, the measures seem to have been calculated to inflict damage and misery without solving the underlying problem. Throughout, emphasis has been placed on upholding the prerogatives of bondholders (the biggest of whom tend to be German banks) over the interests of ordinary citizens of the afflicted countries.
This script has been followed, with subtle variations, in Ireland, Greece, and Spain. In the case of Cyprus, Germany’s disregard for some pretty fundamental principles of banking insurance and fairness is glaring. “Fate of island depositors was sealed in Germany,” read the headline on a great tick-tock piece in the Financial Times on Monday by Peter Spiegel. Before a crucial summit meeting last Friday night, Cyprus’s leaders had apparently agreed in principle to Germany’s demand that bank depositors should foot some of the bill for the rescue—depositors with under 100,000 euros would pay a 3.5 percent levy, while those with more than 100,000 would pay 7 percent. But German Finance Minister Wolfgang Schauble reportedly insisted on a significantly higher level. And if Cyprus refused to do so, it would find it nearly impossible to access emergency funding for its struggling banks. That led to the proposal of a 6.75 percent levy on accounts under 100,000 euros and a 9.9 percent tax on accounts above 100,000 euros—which was rejected today.
What’s appalling—and galling—about the proposal is that Cyprus bank customers, like customers throughout the euro zone, have deposit insurance on their first 100,000 euros. The deposit insurance regimen, similar to what U.S. banking customers have enjoyed with the Federal Deposit Insurance Corporation since the 1930s, was set up in the wake of the 2008 crisis.
The whole point of deposit insurance is psychological. People only feel safe leaving their money in banks overnight because the deposits are insured—no questions asked. The minute you undermine the insurance, or dilute it, a bank run might ensue. Imagine an experiment. Two bank branches sit next to one another in your neighborhood. One has FDIC insurance, which guarantees accounts up to $250,000. The other announces it is switching to a new kind of deposit insurance that only insure accounts up to $225,000, or 90 percent less. The people who would be affected by the change would likely move their cash instantly, and they’d soon be followed by small-account holders. Who wants to leave their cash in an institution that unilaterally and arbitrarily reduces its deposit insurance commitment?
That’s what may be happening in Cyprus. They can call it a bank levy, or a tax, or an asset grab. But, in effect, depositors in Cyprus banks are learning that the insurance that covers 100,000 euros in a French bank will only cover 93,250 euros in a Cypriot bank. Essentially, German officials decided that the euro zone’s deposit insurance scheme doesn’t fully apply in Cyprus—a full member of the euro zone. What’s more, customers at banks that haven’t formally failed would find their accounts pared back.
There was a certain rationale behind the German thinking, which was shared by other members of the euro zone. A lot of the euros stashed in Cyprus banks originated as rubles in Russia. So why should Europeans help bail out dark money from behind the former Iron Curtain?
OK, but what about the Cypriot who had spent all her life working and was sitting on 130,000 euros? Or who had just sold an apartment or a business and had a few hundred thousand euros? Or someone who has a much more modest sum in the bank? It’s a strange moral universe in which it makes sense to break the promise of deposit insurance to these people.