COLUMN: The sickness of the Eurozone

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Colin Chapman
President AIIA (NSW)

NOTES ON THE NEWS: It is a bit of a stretch to describe the elites of the European Union as morally bankrupt. But the EU leadership that came up with the $12.3 billion Cyprus bail-out plan have taken a further step towards moral bankruptcy, as they continue down the doomed path of saving a flawed construct – the Eurozone.

The pity of this is that a good and important creation – the European common market as devised after the ashes of World War II – is in danger itself of being damaged by the policies that are being pursued to save the euro.

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Obtained from Wikimedia Commons

As The Economist newspaper put it, “Cyprus has been crushed” by the bailout, which forces those with deposits of more than €100,000 in the small island state’s banks to take a “haircut” of at least 40 per cent on their balances, as well as having the remainder frozen by exchange controls of indeterminate duration.

The term “haircut” is a banker’s euphemism for having your money stolen. The EU likes to call it a tax, but as such it is a tax imposed without warning on those who have been foolish enough to leave their savings in a Nicosia bank.

Europe’s elites like to point out that much of the money on deposit has come from Russia, and is being laundered by oligarchs. To a certain extent that is true. As Russian premier Dmitry Medvedev wryly acknowledged, what is happening in Cyprus is “the stealing of the stolen”.

But the Brussels bureaucrats, aided and abetted by Germany’s chancellor Angela Merkel, are not financial Robin Hoods. Most of the depositors are Cypriots trying to run a business, operate a hotel or tourist facilities, or are British pensioners who have escaped the rain-sodden United Kingdom to enjoy a little sunshine in the autumn of their lives.

I saw some of these people interviewed on television last week. They are desperate and frightened – not as desperate or as frightened as those fleeing the Syrian civil war just a short distance away, but nonetheless deeply worried.

And just as the European Union sits on its hands as it watched the Syrian disaster, so it has abandoned the Cypriots to their fate. The difference, of course, is that Cyprus is a fully-fledged member of the European Union, and the people who live there have EU passports.

The Eurozone, in effect, no longer extends to Cyprus, because a euro in a Cyprus bank is worth less than one in a German one. At present people who live in the other countries of the Eurozone can move their money freely, but not from Cyprus. A currency union with currency restrictions cannot be a currency union; ergo this is the beginning of the end of the Eurozone, though its death will likely be slow and painful.

If this is not bad enough, there is something worse. When the lead Eurozone finance minister confirmed the conditionality of the bailout, he trumpeted it as a model for the future – to be used on other countries where the banks had got themselves into trouble.

It was only minutes before those with cash in banks in Greece, Spain, Portugal and Italy reached for their mobile phones or logged on to their internet accounts. Board members of the European Central Bank scrambled to say the Cyprus action was no such thing – it was not a template, not a precedent, not a model, it was a “one off”, a special case.

How many times have we heard the spinmeisters of the EU speak of ‘special case’?

I don’t know about you, but if I had money in any Eurozone bank I’d have moved it to Australia immediately.

There have been two years of crises in Europe, and after each of them the share markets have bounced back as the optimists claim that the problems have been solved. I’ve heard finance editors, even on the ABC, make that claim too. But as we have seen, the problems have not been solved. The sickness of the Eurozone is terminal, and it is the moral duty of Brussels, Frankfurt and Paris to admit it.

Colin Chapman is president of the AIIA in Sydney, a former economics correspondent of the BBC, and a former executive at the Financial Times.

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