In what may be the most immoral bailout yet, the European Union has forced the most offensive deal yet on Cyprus. Whoever may still have cash left in the bank in Cyprus will quickly learn a lesson to never again leave a cent in a local bank.
According to the new EU-forced bailout conditions for Cyprus, bank depositors will be required to hand over up to 10% of their savings in order to get the bailout. Besides the insanity of asking the victims to pay for the crimes committed against themselves, the EU is effectively telling the world that anyone who deposits cash in an EU bank could be forced to pay for future bailouts. Which thus provides an incentive not to save, which is a problem economically.
This is a loud warning to the world that your money is not protected in Europe. As Krugman mentioned last night, this is the EU holding up a neon sign saying “time to stage a run on your banks.” Those who have the means can and will move their money, while everyone else will again be left twisting in the wind. Or will move their life savings into their mattresses, which is hardly secure. It also means that in the future, people will do more than ever to hide their income so that the government doesn’t know about it, and can’t just take 10% of their savings by fiat.
Previous EU bailouts across Europe have resulted in worsening economic conditions, due to ill-timed austerity, and there’s no reason to think this bailout won’t do the same for Cyprus. The EU choices for Cyprus are essentially death by bankruptcy or death by financial torture. Sooner or later, one country is going to choose bankruptcy and move on. Extending the economic pain with brutal conditions has provide no relief to Greece, Portugal, Ireland or Spain, where unemployment numbers are setting record highs, while the economies continue to flounder.
The bankers who gambled away and lost trillions still have their comfortable lifestyle, but for everyone else it’s “tough luck.” The EU, like the US, is showing the world in clear terms that there is a two-tiered justice system when it comes to bailouts.
Public policy in Europe and the US has been all about punishing anyone with cash in the bank for years, though this is a significant step too far. Prior to last night’s announcement, central banks punished depositors with horrendous interest rates and low inflation. Those policies have been painful for many, though delightful for the bankers, who get free money from the central banks and then gamble for higher margins.
As the banking crisis continues to unfold, Iceland appears to be the country that got it right. Instead of inviting banking executives to the White House and treating them like royalty, they arrest them and throw them in jail.
As bad as the low interest/low inflation numbers have been for the general population, it was still a more discrete attack on the middle class than this. The European Union needs to do some serious soul searching after forcing this brutal deal on Cyprus. They also need to step back and determine whether or not they want to have a banking industry that people trust, or if they prefer to have people of the EU keep money under their mattress at home.
This latest move to protect the guilty and punish everyone else shows us that even though we’re years past the initial banking collapse, we’re still nowhere near solving this problem. Whether the banks are receiving $83 billion per year or $780 billion per year, it’s clear that their “profits” are all smoke-and-mirrors. And when the game ends, it’s the little people who are stuck with the bill, yet again.