Posted by: theoptimisticconservative | March 26, 2013

Cyprus: When law and order prescribe theft

Who will shoulder the pain from the Cyprus bailout deal?

The first-order sufferers will be small businessmen (mostly Russian) and upper-middle Cypriots and foreign residents with their money in Cypriot banks.  But the whole region will take a longer-term blow from the loss of Cyprus as a place for upstart businesses to park capital.  Capital that can’t be parked cheaply in the EU won’t be invested in the EU – at least not by the smaller, less financially “connected” entrepreneurs who drive economic dynamism and growth.

The big Russian firms that bank with the Russian Commercial Bank in Cyprus have protection in the deal, although they will have more trouble moving capital around under the “capital controls” to be implemented, to keep depositors from draining their accounts.  Russia has been relatively quiet and mild on the terms of the Cyprus deal, largely because the biggest Russian depositors in Cyprus bank with the RCB anyway, and won’t be hit with the 40% “amputation” tax on their accounts.  For the average traditionally-autocratic government, smaller entrepreneurs are always easier to accept as roadkill.  They may create jobs and revenue, but they aren’t in a position to line politicians’ pockets, and they’re not easy to marshal as a means of geopolitical leverage – unlike, say, Gazprom.

It will hurt the EU for Russians to flee Cyprus; it will hurt equally for only the biggest, most state-connected Russians to remain in Cyprus.  I don’t think all the Russians will flee.  But I do think that if nothing else changes, and the bank deal defines the future, the dynamism of the Russian economic presence in Cyprus will be bled off.  The economy of Cyprus will become more of an elephants’ dance than a coyote squabble, even with the gas eventually coming up from the ocean floor.  Cyprus will go further down the road taken by too much of the EU, discouraging entrepreneurship and overserving itself on the future obligations.

Italy and Spain are obvious others to bring up, of course, and everyone is doing that.  Besides serious debt and bank-solvency problems, they have already gone further down the controlled-economy road than Cyprus has.  (Which is the main reason for their debt and solvency problems.)  Their big-name companies, the international giants, are incapable of growing the economy, because it doesn’t work that way.  The big firms aren’t the future.  Small entrepreneurship is always and everywhere the future, and in Italy and Spain, engaging in it openly is discouraged by regulation and the tax code.

There is a regional aspect to this, of course; a difference among points of the compass, inside both countries, and between city and hinterland.  Such differences are creating fault lines throughout the EU.  Those gaps aren’t going to narrow any time soon.  Now is a good time for the EU to take stock and recognize that the entire Cyprus problem, like the Greece problem, was created by the actions of government.

Left to their own devices, people coming together for economic activity don’t do this to themselves.  Failure is liquidated; it is not enshrined in policy.  But governments do the opposite, propping up and enabling failure for as long as they can, because they insist for political reasons on the policies that make it inevitable.  Government’s perspective is always political, and therefore inimical to economic efficiency.  The more government is chartered to control, the richer a society has to be to afford it.  And unfortunately, there’s a kind of “peak government” rule to this: a society in which government controls too much cannot stay rich.

The U.S. is headed down this path too, but most of the EU is already further down it.  The EU and its individual nations created this problem through policy.  There’s a political relief-valve aspect to making “the Russians” pay for it (although the FT article linked above points out that at-risk Russians expect to find ways to get their money away from the amputator’s saw).  But the Cyprus crisis illustrates nicely that the cost of over-regulatory government will lead to outright theft from the people.  Policy as cosmically comprehensive as that in the EU model will indebt everyone, until theft seems to be the only option left.

This isn’t a condition for stability.  Moscow hasn’t given up on Cyprus, which still sits enticingly athwart Turkey and Europe.  The Cyprus deal won’t last very long – not while Cyprus and the EU remain in the vise of the EU’s negative, defensive policies.  (If the Russians sneak enough of their money out, the Cyprus deal won’t last long enough to auction off the office supplies with the Laiki logo.)

What Cyprus needs is positive help – geopolitical, regulatory, investment – to strengthen her economy.  Her banks can’t be made liquid and viable by any other method.  The Russians have descended on her over the past 20 years with entrepreneurial excitement, but they’ve done so in the context of the EU orientation of Cyprus.  Politically, Cyprus was on her own.  Why don’t, say, the Brits and Dutch descend on her with entrepreneurial interest, plus a political interest in building up Cyprus as a thriving European outpost?  There’s going to be a new status quo; the time to start shaping it is now.

But “EU-ism” is probably not constituted to do anything about that, even if some can see the need for it.  This is a big test for the EU concept, whose fundamental approach is to assume static political and economic conditions and increase regulation in the context of them.  In the absence of an economic surge, restructuring the Cypriot banks may briefly satisfy our ideas of financial management, but it’s basically a paperwork drill.  The EU, as it has been practiced up to now, doesn’t have a useful answer to the Cyprus question.  We’ll be doing all this again before too long.

J.E. Dyer’s articles have appeared at Hot Air, Commentary’s “contentions,Patheos, The Daily Caller, The Jewish Press, and The Weekly Standard online. She also writes for the new blog Liberty Unyielding.

Note for new commenters: Welcome! There is a one-time “approval” process that keeps down the spam. There may be a delay in the posting if your first comment, but once you’re “approved,” you can join the fray at will.

About these ads

Responses

  1. Who should shoulder the pain from the Cyprus bailout deal?

    Primarily the banksters (that are not only based in Cyprus) that gambled depositors funds by investing in worthless Greek public bonds. That’s what destroyed the Cypriot banking system. Not the Cypriot, British, Ukrainian and Russian business depositors, nor ordinary savers that happen to have deposits over 100,000 euros.

    “It will hurt the EU for Russians to flee Cyprus”

    To paraphrase Medevdev “the robbery of already robbed funds continues”. Let the Russian (and Western) money launderers take a big hit,. they should pay. German has 485bn in Russian assets, It will be interesting to see who will investigate about the origin and legitimacy of these deposits now that there is the Cypriot precedent.,

    “The US is headed down this path too”

    The US is beyond this path. it’s foundational Bretton Woods legacy is the only plank holding it up.

    Through the perverse debt/leverage/derivative model now the norm in financial transactions. an example that culminated in the Lehman crash, Russia owns a big chunk of Cyprus. Debt is leverage, probably why there’s no sweat about Cyprus in the Kremlin.

    Lastly the financial elite and their political employees in the West are so far removed from reality that they have no idea how to solve the predicament they have gotten us into. Nor are they concerned. Their money keeps rolling in. Smoke and mirrors coupled with seven digit salaries for doing absolutely nothing except ballooning numbers are the catalyst for uprising and revolution. I say shut the damn thing down.

  2. Once societies legalize outright theft, collapse is unavoidable. Cyprus is the E.U.’s Rubicon, it is the first of the dominoes to fall. The real moral of the Cypriot story isn’t the viability, present or future, of the Cypriot economy, it’s the certainty that the E.U. is doomed because arbitrarily stealing Cypriot depositor’s money is an implicit admission that the EU is essentially bankrupt and that it has decided that outright theft is the only way left to keep the economic boat afloat.

    The consequences of the E.U.’s reaction to that economic reality will be fiscal collapse and dissolution of the EU because a society in which government controls too much, is not simply unproductive, it cannot survive without becoming totalitarian. Since totalitarian control in historically balkanized Europe is unachievable, dissolution is unavoidable.

    The European Union is a ‘dead man walking’, its dissolution a foregone conclusion. Denial and desperation will keep its collapse at bay for a bit longer but the patient’s prognosis is terminal.

    • You are right GB…unless we can muster the up the strength to rein in (or expel) Germany.

      Only now is the fatal error of a reunified Germany in an integrated Europe beginning to become apparent. If it were up to me, after the wall came down I would have quartered the wench, not put her back together again, especially with her Prussian East. There was no credible Russian threat anymore to warrant her unification.

      I make no excuses for the corruption and mismanagement that led to the current situation in the weaker European states. I do though lament the the inaction of Albion. If ever she was needed to counterbalance the Hun’s excesses in the past five years, now was the time. Forgive my political incorrectness

      There is still a glimmer of hope. I refuse to accept that Europe will once again be thrown into the abyss, due to German greed.

      • I’m not particularly knowledgeable about Germany’s actions, so I am open to further education. That said, to place primary responsibility for the E.U.’s troubles upon “German greed’ is to, IMO profoundly misunderstand the situation.

        It is socialism and the entitlement state which has led to the E.U.’s fiscal troubles, not German greed. The EU has simply run out of other people’s money. Germany has been subsidizing the unproductive PIGS along with France, Belgium, etc for at least a decade. If anyone is ‘greedy’ it is the PIGS et al, whose attitude is a defiant disregard for fiscal probity.

        Even the traditionally ‘thrifty’ Scots have been seduced into the entitlement mentality. Nine in ten Scots ‘living off state’s patronage’

        “Almost nine out of 10 Scottish households take more from the public purse than they contribute in taxes”

        When more take than they contribute, how long can the house of cards continue?

        When Germans are the ones preventing collapse and state that they will loan but not give away their nations earnings, how is that being greedy? Is charging higher interest for an undeniably risky loan… greed? Or is it necessary insurance against likely loss? Especially when the countries that are most in need, repeatedly refuse to pay more than lip service to austerity, acting like a spoiled child that refuses accountability?

        • You are right GB. I let my emotions get the better of me (once again).

          It is wrong to attribute the situation facing Europe to German greed.

          Yet Germany carries her share of responsibility for the mess Europe finds herself in

          Germany, (along with France), were the first to break the stability rules devised to maintain fiscal order in the Eurozone.before the crisis broke out.

          I’ll just have to put it in more technocratic terms next time I’m up to writing about it :)

          • Not a problem jgets. No one is always immune from the ‘suasion’ of emotion. Precisely to which “stability rules devised to maintain fiscal order in the Eurozone” do you refer? I would also ask why did Germany break those rules and were there any extenuating circumstances that made Germany’s actions explicable?

            • The extenuating circumstance in reference to Germany was the cost of reunification, but it set a bad fiscal precedent.for the rest of the EU.

              The following two links, and the additional links included in the first, sum up how the stability and growth pact and the Maastricht Treaty were undermined by Germany and France. Germany and France essentially forced several changes to the rules since it suited them to maintain growth at the expense of running higher annual deficits (over 3%) than the treaty allowed for. No one had the power to prevent them from rewriting the rules, several times, rendering them meaningless, Then the Lehman meltdown followed , and the rest is history. Again I do not wish to excuse the behavior of other European states, just to point out that Germany and France, through their policies have also contributed to the current mess.

              http://www.civitas.org.uk/eufacts/FSECON/EC10.htm

              http://www.bbc.co.uk/news/world-europe-16761087

            • I would just like to add that extenuating circumstances (again not to excuse mismanagement) could be cited by other European states besides Germany case and unification..

              The fact that Greece must annually outlay 5% of her GDP, the highest in Europe, for over thirty five years now, in order to defend herself from territorial claims by NATO ally Turkey, could also be cited as an extenuating circumstance contributing to her recent economic performance.

            • i did have a previous reply to your last about German unification being the extenuating circumstance, plus two links describing why Germany isn’t faultless. My currently visible reply is just an addendum. The main reply dropped off the thread for some reason. I’ll re-post them if necessary.

              • jgets, any post with 2 or more links in it goes to moderation. If you want to post 2 links, I recommend separate comments. It’s a bit of a pain, but it really is true that spam becomes unmanageable if comments with 2 or more links are allowed, Thank your friendly basement-dwelling spammer for this one.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Categories

Follow

Get every new post delivered to your Inbox.

Join 244 other followers

%d bloggers like this: