Tuesday, 15 January 2013

The Consequences of Exits

The case of Cyprus undoubtedly resembles the case of Greece. The amount the country needs is not large per se, as was the case with Greece, yet it is the equivalent of about 100% of its GDP, casting doubts on whether its lenders would ever be able to get their money back. In both cases, two options exist (and existed): either give the country all the money it requires to completely avoid default or let it fall and consequently exit the EU or more likely the Eurozone.

Advocates of the latter base their arguments mainly on whether it is rational or good practice to send good money after bad, or whether the EU will forever be the lender of last resort for troubled nations. As the number of Member-States which face trouble as a consequence of either irrational expenditure or housing bubbles continues to rise, proponents of the Pontius Pilate method (i.e. "I wash my hands of the subject") believe that a line should be drawn somewhere. Yet, where should that line be drawn and what are the consequences, if any, of that action?

During the most severe case of the Greek crisis over the last 6 months, notably over the summer months, it was stated that there was a great danger of Greece exiting the Union. What we have witnessed, however, is that Brussels made the decision to support the nation, both monetary as well as politically, given that the Greeks would play their part as well (which they did). Economic consequences would have been severe had Greece exited, but what of the consequences of a Cyprus exit or another small country's?

Here, the problem is mainly political and not an economic one. Having barely 0.2% of the EU's GDP does not qualify the island on being an economic force whatsoever. Nevertheless, think of the consequences of setting a precedent by letting Cyprus fail. The probability exists that all other countries will fear that their turn will come if they do not pay attention to their fiscal policies and they will do their best to follow suit on the instruction of the IMF and Brussels (or is it Berlin?). Yet, there is another possibility: that the Member-States will think that such a behaviour is not an acceptable one, and one could liken it with bullying: kick the little guy out so the medium ones can see what will happen to them if they disobey. And what of the probability that other Member-States may think "if Cyprus is out of the Eurozone and can work it out why don't we exit as well?"

It has to be considered though that it is highly unlikely that another country will be in direct need of assistance in the near future (one cannot foresee the outcome of the Italian elections however). This would mean that essentially what the EU would be doing is that they should be supporting one of their own; or even better something they created. Was it not Victor Frankenstein's fault for the monster he had created? Now it is their fault for not looking two steps ahead when they were making the decision on the Greek haircut about a year ago. 

Exits should not be an option for either Eurozone or EU countries. If even a small country the size of Cyprus exits then you may mark the day as the one which set off the destruction of the EU. All that has been built over the past 70 years, all that nations have been through over the past couple of years, with uncertainty and economic misery would be in vain. What is the message by the EU officials if when a nation is in trouble we fail to assist it?

Cyprus is merely an example. Greece was the example in the last few months, and hopefully Italy will not become the next example in the following ones. We cannot have a perfect Member-State, we cannot have a perfect Union. Yet, we can support each other, regardless of petty issues. Spiegel mentions that the island is considered a safe haven for tax fugitives. One can remember posts about Russians moving funds to Cyprus for the last couple of years. Why now? Why didn't the EU try to impose stricter regulations on Cypriot banks earlier than that? 

The same issues arose in Greece, Italy and Spain. Why did Brussels fail to do nothing, not even suggest something when they had known about tax evaders in Greece since 2009 (the now notorious Lagarde list featuring more than 100 names of fraudsters with millions of deposits abroad)? Or why did they not try to change the Italian election law, which essentially does not let the people elect whom they want to lead them? Even better, why haven't they tried to do it when Mario Monti was in charge (he tried to pull it through but I believe that the legislation has not yet been passed) or even try to push Italian politicians now to do it? How about Spain and the horrible situation with evictions and homeless people? 

I can agree that the EU does not have the power to meddle in Member-States legislation and politics; nor should it. Yet, it should be noted that EU law is superior to country law, and thus many a legislation could be passed on in Brussels; legislation on important issues like election law, money laundering or evictions. What is more is that they should be able to impose severe sanctions to the members who disobey on serious issues. Being an optimist I hope that the memorandums have given the EU an opportunity to make the living environment better in the ailing countries than it was before; not used merely for punishment.

Cypriot presidential candidate Nikos Anastasiades with Angela Merkel.
As for a prediction: the EU will grant Cyprus its memorandum and support. How much money the island will receive and what sacrifices they will have to do I cannot know. Yet, it is highly unlikely that they will receive it before the February election results as a change of government will bring a change in credibility; the same issue with Greece over the summer. Just wait and see...

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