March 22, 2013

The Václav Klaus Institute's Public Statement: Cyprus crisis and its unprecedented solution

Three days after the entry of Cyprus into the European Union – on May 3, 2004 – the delegation of the President of the Czech Republic arrived on a state visit to Cyprus and was met with euphoria, facing declarations and slogans such as “We are in Europe”, “We have entered Europe”. We tried to explain, they were “only” in the European Union, because one can enter a man-made institution, such as the EU, but not a continent. It can’t be “entered”. The brutal division of the country and the capital gave a depressing impression, but otherwise the country did not seem to be doing badly.
The economic, or more precisely financial problems of this small island country of 839 000 inhabitants, which has for its size an overly developed banking sector and belongs to the so called tax havens (the membership in the EU changed nothing about that!), have been lasting for some time now.

At the beginning of the 21st century, i.e. before joining the EU in 2004 and the Eurozone in 2008, the Cypriot economy enjoyed a relatively good health, based on a fast development of the service sector, on a relatively qualified English speaking workforce and low public debt. That, however, began to change fast after the adoption of the euro and the subsequent inflow of cheap credits from the EU and deposits from Russia. The unregulated banking sector in the tax haven massively expanded and many times exceeded the size of the Cypriot economy. The general wave of unrealistic optimism lowered the savings rate, deepened the current account deficit and the bubble increased prices on the real estate market. As it was, a large part of the investments of Cypriot banks went into real estate and assets in Greece. In spite of the fact that Cyprus dealt with the crisis of 2009 relatively well in comparison with other countries of the European south (real GDP went down only 1.9 %), the so called Greek crisis and its consequences affected the Cypriot banks very strongly. While in 2008 the unemployment rate in Cyprus was 3.8 %, today it is 13 % – the largest increase in Europe. The government debt of Cyprus is 86.5 % of GDP, in the Czech Republic it is about half.
When we last met the President of Cyprus, he already indicated there were difficulties, which were – according to him – impossible to solve without help from the EU – help, which materialized on Friday night, March 15, 2013, through the decision of the EU finance ministers.
Cyprus was promised 10 billion euros (the amount requested by the Cypriot government was 17.5 billion) from the International Monetary Fund. In departure from previous bail-outs, however, Cyprus was made to introduce a first-ever bank deposit tax of 6.75 % (rising to 9.9 % on deposits above 100 000 euros).  In reality, this “tax” is nothing but a direct confiscation of depositors’ money.
This leads to several conclusions:
1. The EU is quite openly becoming a transfer (or fiscal or financial) union, which is redistributing money from one country to another, i.e. from the citizens of one country to the citizens of another country. This had been envisaged neither in the founding Treaties of Rome in 1957, nor in the Maastricht Treaty in December 1991, nor in the Lisbon Treaty in 2009. This is not the Union we – or Cyprus – joined on May 1, 2004.
2. The bail-out deal of 10 billion euros equals 56 per cent of the Cypriot GDP and exceeds the equivalent of the loan of 109 billion given in May 2010 to Greece, the population of which is almost thirteen times larger. To make it comparable, Greece would have to be given 128 billion.
A comparison with the Czech Republic is also meaningful. To get a loan of the same size, we would have to receive 125 billion euro, which is according to the latest exchange rate 3,197 billion CZK. That corresponds to 271 % of the Czech national budget for 2013 (i.e. almost triple fold) and close to the value of the Czech GDP. The numbers are incredible.
It is the first time the European Union touched the money of individuals (and companies) deposited in banks. Technically, it was labeled as a supplemental, one-time taxation, but there are also other words that come to mind, especially of those who are about to lose their money. In reality, it is about a fundamental loss of confidence of the markets and the public in the possibility of financial rescue of Cyprus and the whole south of the Eurozone. Who will suffer the consequences? It will be other countries in trouble, as well as the euro itself. It will affect the money of both Cypriots and foreigners, including Czechs, who set up their companies in Cyprus to avoid paying taxes in their home country. In the end of 2012, a total of 1094 (!) Czech companies had their mother company in Cyprus. Depositing money in a bank, which is not healthy, and in a bank in a country which is financially not healthy is a risk that everyone should be aware of. That is a universal wisdom and should also be a personal wisdom of all those who lived through the financial and economic crisis of 2008 – 2009 and who follow today’s debt crisis of the Eurozone. One would have to be blind not to notice the problems of the southern part of the Eurozone, i.e. countries around the Mediterranean. Something was bound to happen – also with the deposits and accounts of the individuals – sooner or later.
Such a solution to the problem, or a similar one, was inevitable and each country should have such emergency solution at hand. What is new, however, is the fact that the “taxation” was not decided by the country itself, but by distant – in case of Cyprus indeed very distant – Brussels. That is a loss of sovereignty that was unknown in the past. It is a revolutionary step and a warning for other EU countries and their citizens.
Yet another big step in the European antidemocratic unification was taken.
Václav Klaus Institute, 19. March 2013