After a week or so of protracted cliff hanging Cyprus seems to be receding from the media’s lens. Is it all over and Cyprus and the rest of us, including the Eurozone, can get back to what passes for normal? Most unlikely. Early indications are that Slovenia could shortly be the next in line for a rescue package, putting yet more strain on the ECB and the EU. As for Cyprus itself, the consensus is that the country and its citizens are in for a very long period of economic contraction with all that entails. The reputation of its banking and financial sector has taken a big, big hit and it is not clear that it can survive in anything likes its previous form or size. The austerity measures agreed by the Cypriot government will only add to this misery for ordinary Cypriots.
Why did all this come to pass? The media has been full of tales of corruption, over borrowing and tax havens for the Russian mafia. This has been very much the dominant narrative here in the UK, USA and most of the EU. But how accurate a picture is it of Cyprus and in particular of its financial sector? Not at all, by many accounts. While tax evasion no doubt exists in Cyprus, there is little evidence that it is greater than elsewhere in the EU. Nor is the relative size of the financial sector that out of line with other EU states – see Luxembourg for example. For a more detailed and positive view of the Cypriot economy see this article from Naked Capitalism. It is also known, but under reported that Cyprus and its banks were badly hit by last year’s restructuring of Greece’s debt. This involved large losses for Cyprus. So it was known for over a year that Cyprus would need some kind of help. Why has it taken so long to reach a deal? Why the attempt to destroy the Cypriot financial sector? Something fishy seems to be going on here, but it is not clear to me just what this is.
With the crisis has come the usual blame game. If it is not the fault of the Cypriots themselves then it must be those nasty Germans. Or at the very least it must have something to do with the Euro. As regards the Euro, there is so far, little evidence that it is the existence of the single currency per se which has caused this latest crisis. The Euro, like any other currency is a tool, and as such has to be managed. The management of the Euro by the ECB does of course leave a lot to be desired.
But the basic problem goes deeper than the ECB. What is killing recovery in the EU is the pig headed stubbornness of the leaders of almost all EU countries to pursue neo-liberal austerity measures come what may. Even the IMF is no longer convinced of this austerity promotes growth nonsense. Evidence that it does not work is to be seen everywhere. Yet almost all our national leaders continue to stick by this discredited policy. Note too that this is not some German plot. Though Germany does favour austerity it is not alone and there is no way in which Germany on its own could force the other member states to adopt these polices. Consider the fact that the leading figures in the Eurozone in charge of economic and monetary policy are Mario Drahi, the Italian President of the ECB; Olli Rehn from Finland, the European Commissioner for Economic and Monetary Affairs and the Euro; and Jeroen Dijsselbloem from the Netherlands, President of the Eurogroup, the body which co-ordinates economic policies within the Eurozone. Now it is theoretically possible that they are all German stooges, but I think this unlikely. Nor is this just a Eurozone matter. Our political masters in the UK are equally wedded to this austerity and more austerity nonsense. The only perceptible difference between Labour and the Coalition is that Labour would try to slow the pace of austerity, not change direction at all.
Quite why almost all EU political leaders are so completely wedded to this comprehensively failed economic experiment is beyond the scope of this post. Perhaps psychiatrists will be required to attempt to resolve this matter. For a brief introduction to this aspect, see this recent post by Paul Krugman.