Cypriot courage burns bright

Cyprus’ refusal to accept the terms of a troika-imposed bailout has exposed eurozone ‘solidarity’ as a myth and shows the true forces arraigned against Ireland, writes Ray Kinsella

THE attempt by the troika to sequester the deposits of the people of Cyprus in its ill-conceived bailout was a catastrophic mistake. It also laid bare what has long been evident to peripheral countries, including Ireland. These decisions are being made by an elite who understand neither economics nor history; they are pedlars of discredited myths.

It may be that some kind of deal is done in the next few days — perhaps a bond collateralised by either existing or perspective-energy related assets. Russia may lead, or participate in, such an arrangement. There are likely to be bank mergers. Cyprus has a liquidity problem. It also has a solvency problem which reflects the exposure of its banks to Greece. A “deal” will attempt to put a gloss on the misconceived “bailout”.

But there is no going back on what has happened — neither for the markets nor for member countries which have watched this debacle unfold. The damage to the ECB’s credibility is enormous. It undermines its monetary policy function, with consequences for the global economy at a time of economic weakness and a looming political crisis in the Middle East. ECB governor Mario Draghi’s pledge to “do what it takes to save the euro” has been called into question.

The role of banks — especially retail banks — is to intermediate between and borrowers, to take short-term deposits and transform them into longer-term loans. This only works if people trust the banks to make their deposits available on demand. It almost passes belief that the ECB — the guardian of banking stability — should compromise this trust and, in the process, spark a generalised questioning of the safety of deposits across the eurozone and especially in Spain and Italy

The discredited myths that have been exposed are several.

The first are that austerity works and that the troika knows best. Well, it has long become evident that austerity, which corrodes the capacity of an economy and condemns tens of millions of European citizens to unemployment and dependence, does not work.

The second myth is that the brute power of the troika, and the economic mindset which it reflects, is such that vulnerable countries will roll over. Cyprus didn’t. In facing down the troika it has performed an incalculable service to European democracy. It may be that Cyprus is forced into voting again — something we in Ireland know all about. Even so, the point will have been made that small countries have the commonsense completely lacking in those who presume to order their affairs

The third myth is that there is no option for Cyprus except to go along with a troika-imposed deal. Yes, there are options. The banking system needs liquidity. But it can print notes and the value of a currency ultimately depends on the resources of an economy and the credibility of policies designed to put those resources to work.

Cyprus does have the option of exiting the eurozone. For the troika elite, and for Germany, every threat will be marshalled to compel them not to do so. But, really, what is at issue here, is the self-interest of the dominant countries and their banking systems and their economic interests. For Cyprus there are costs to exiting the euro. There are also costs to remaining within a system that is marked by bad economics and brute political power. That is why I have argued in these pages that it would be better for Greece and Ireland to have exited the euro rather than seeing their economic capacity emasculated and their political governance shackled to a dependence on “those who know better”.

A fourth myth is that the eurozone is all about solidarity. This has been well and truly discredited in the past five years. Solidarity means doing what the big boys tell you. Partners include those most likely to lean on you when you are at your weakest — as Ireland experienced in 2011 when France (now with its own difficulties) attempted to trade off a change in Ireland’s corporate tax rate for considering some form of debt relief. Solidarity means watching while Spain and Italy do an overnight deal on a bank bailout leaving Ireland waiting in line for a year waiting for equivalent treatment.

A fifth myth is that Germany is paying for all these bailouts. That is a wholly incomplete perspective. The eurozone has enabled Germany to establish economic and political hegemony within Europe. Its balance of trade within the eurozone has been a platform for domestic economic stability. It has largely succeeded in imposing its economic mindset on its “partner” countries. To argue that Germany is paying the price is to ignore the point that the president of the European Commission, José Manuel Barroso, made on his recent visit to Dublin: “I think the Europeans should not forget that the Irish people avoided — with a lot of burdens put at the end on their shoulders — a crash of the whole European banking system.”

For the moment, the frenetic scramble is on to do a deal that will (again) “save the euro”. Cyprus will be lectured that its banks may not open again and the EU Commission will attempt to insist that whatever deal is done is “wholly exceptional and does not constitute a precedent”. But the precedent has been set and the experience of Ireland and Portugal under the hands of the troika has already been vindicated. For a brief few days the true face of what the eurozone has descended into has been lit up by the courage by the people of Cyprus and their politicians. Nothing will be quite the same again.

*Ray Kinsella is on the faculty of the UCD Michael Smurfit Business School