Cyprus Problems May Sink Eurozone

Until this week, one considered the governments in the eurozone too aware of their own self-interest to allow the project to fail. Simply put, the costs of even the smallest state leaving would have such dire ramifications that the larger economies would act to protect the euro. That is no longer true. The bail-out package offered Cyprus came with unacceptable conditions, and the Cypriot parliament rejected it. The government in Nicosia says the coming hours will decide the nation’s fate. This journal fears that is so.

The lenders’ proposal was unprecedented in its foolishness. The EU and IMF offered the country €10 billion of the €17.7 billion Cyprus needs to stay afloat. Those two demanded that Cyprus come up with the rest by confiscating some of the money savers had in the banks there. For those with under €100,000 on deposit, the rate would be 6.75%, for those with more, it would be 9.9%. While it might be fair to insist that Cypriots accept some of the responsibility, punishing people who deposited their money in the banks was weapons-grade stupidity.

First of all, deposits in eurozone banks have a guarantee of €100,000. Money up to that amount is protected; this move destroys that certainty. Second, the depositors are not the people who made the bad loans (largely to bailed-out Greece), but rather the bank management. Third, Cyprus has other assets, such as 5-8 trillion cubic feet of natural gas that can be developed. Fourth, the eurozone has been careful to avoid scaring the markets as it has rescued its suffering banks – will Cyprus be a precedent now? The euro is at risk now over an amount of money only a bit bigger than Warren Buffet’s capital injection to Goldman Sachs in 2008.

So, the world waits and watches as the yahoos that brought the euro to the brink try to figure out what to do next. A new offer is likely over the week-end. It may not be any better than the one the Cypriots rejected. The bottom line for Germany is that its taxpayers will not bail out the wealthy Russians who are hiding their money from their own government by putting it in Cypriot banks. The bottom line for the Cypriots is they want their banks treated the way Spain’s were — a lifeline that didn’t steal from the thrifty.

The Russians, of course, are an alternative to the EU. The Cypriots and Russians have been talking, and there is a deal to be struck — Russian cash for Cypriot natural gas (which will take 10 years or so to develop). Moscow could take control of one of the troubled banks in Cyprus as well. It is difficult to see which would be worse for Germany and France, having the eurozone lose a member and all the costs that entails, or having the eurozone saved by Vladimir Putin at the price of a Russian protectorate in the Mediterranean.

This entire fiasco could have been avoided. But electoral calculations in Germany, where Chancellor Merkel is up for re-election this autumn, have created a situation in which there are no good options. The question now has become just how expensive are Europe’s principles? One doubts the eurozone can afford them.