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...

Super Mario vs German Stubbornness

In my past articles, I have stated that the only trustworthy person in the crisis-involved countries is Mario Monti. And he proved me right! Yesterday afternoon he asked for more flexibility from Angela Merkel concerning the way the EU tackles the crisis and for "moral support not financial". While his popularity has dropped significantly from 70% to about 40%, Monti seems to be the only European leader who understands the situation more than anyone else. He introduced measures to reduce Italy's huge deficit and is going along just fine without so far any assistance from Troika or the EU.(I really hope I don't jinx the guy!)

In yesterday's statement, he stated a fact which Berlin does not want to acknowledge: there is growing resentment in the South towards the Germans and Europe. He states that if borrowing costs do not fall until next year's elections then the newly-elected government may be a Euro-sceptic one. This is not only true for Italy as most Southern countries have started viewing favorably to an exit from the Union. If exits from the Eurozone begin to occur, then Germans can be proud of producing an unprecedented collapse of the world economy, which will be far worse than the Great Depression.

Germany has become one of the greatest beneficiaries of the crisis, since it is considered a safe investment, and it has maintained an extremely low interest rate for its bonds. It is reported that for July bond issues the yield was -0.06%. Yeah, that's right. People are losing money in order to invest in Germany! Even Wolfgang has stated that interest rates are unusually low. If that wasn't enough, it seems like Germany is actually saving most of the money it has obtained from bond issued to use it as a windfall! (for details read this) These savings are about to reach three digits soon (and that's in billions). And of course, Wolfgang, a direct descendant of the German arrogance and stubbornness which led to two World Wars and an economic collapse in the first half of the previous century (and after conversations with many Germans, I thought of being extinct) states that Germany does not have to apologize for financial markets trusting them. Hmm, even if that is because you steadily hold everyone else down Wolfgang?

Paris and Berlin speak of austerity: they were the first ones to break the pact for Stability and Growth in 2005. Yet, the EU did not (and will never) fine them. It looks like laws and pacts are like spider webs; small animals get trapped in them, while larger ones break through. Both countries are in favor of a low Euro. It helps the boost their exports significantly and this is very helpful as, although their economies are stronger than all of the Southern ones, they are still weak. Meanwhile, if a country or more exits the Union, the consequences for both countries will be severe. Losses from a Greek exit could reach 66bn for France and 89bn for Germany and the global impact of it would reach 1 trillion euro. (for details on these calculation read this) You still don't care about Grexit Rösler?

You may easily imagine what will happen if Spain, Italy or both exit the Union. Germany will say goodbye to those hard gathered savings from the low interest rates. Conclusion and moral of the story above: Act to save the Union before it's too late for everyone.