The Eurogroup agreed on Monday night to allow Cyprus to change the make up of its controversial deposit tax. Instead of imposing a levy of 6.75 percent on savings under 100,000 and 9.9 percent on those above 100,000 – as agreed in Brussels in the early hours of Saturday – Nicosia can play around with the numbers, just as long as it raises the arranged amount of 5.8 billion euros.
Cyprus’s new but already beleaguered President Nicos Anastasiades is proposing that bank customers with deposits under 20,000 euros should not be taxed at all, while keeping the levy the same for the remaining depositors. Cypriot MPs have already shown a reluctance to approve the tax, mindful of the impact on depositors but also the long-term damage it could do to the island’s banking system and economy.
However, what’s happened over the past few days and what’s likely to happen in the days and weeks to come has little to do with numbers. It is much more about perceptions. Even if a financial meltdown is averted in Cyprus this week, the decision to tax depositors there in order to reduce the eurozone and International Monetary Fund contribution to the island’s bailout has sown the seeds for a future eruption.
The Eurogroup’s decision on Monday was a clear attempt to correct a mistake, while steadfastly refusing to admit one had been made. There are different interpretations about what happened in Brussels late Friday and early Saturday but ultimately they matter little compared to the end result, which was that Anastasiades flew home to implement the first depositor haircut in the euro’s history with the blessing of fellow eurozone finance ministers and the IMF’s Christine Lagarde.
There is nothing the Eurogroup had to say to the Cypriot government on Monday night that it could not have said in Brussels a few days earlier. The only difference was that by Monday the reaction in Cyprus and other parts of the eurozone to the idea of a deposit tax, including on guaranteed savings, had underlined what a perilous idea it was to start off with. From Sunday, eurozone governments and finance ministers who had been at the Eurogroup meeting, started to distance themselves from the idea of taxing small-time depositors with such frequency that it seemed hardly any of them participated in the Brussels talks and the few that did were strong-armed by Anastasiades into accepting a tax for deposits under 100,000 euros.
The back-pedalling and hand-wringing has been an embarrassing spectacle but it has also laid bare the unedifying eurozone decision-making process and the lack of stature amongst its decision makers. The only two plausible interpretations for the Eurogroup approving such a self-destructive decision as taxing all bank deposits is a complete disregard for the consequences (doubtful) or an utter underestimation for the effect it would have (more plausible).
The latter suggests that one part of the eurozone is now completely out of step with the other, unable to understand its challenges, its concerns and, ultimately, its reality. Only a core group of decision makers with no sense of the fragile state of societies in the periphery, which have been battered by deepening economic crisis and uncertainty for months on end, would favour a policy that creates a precedent for governments to grab people’s savings without second thought.
Even if capital flight from Cyprus as a result of this decision is less severe than many fear, even if Cypriot banks survive this real stress test, even if the island’s economy is not set back many years, even if savers in Greece, Spain, Portugal and Italy don’t panic, the idea of a deposit tax and the way it was adopted has released something poisonous in the air. It is difficult to see how these citizens will be able to trust the system – be it their governments, banks or eurozone partners – in the weeks to come. Belief in countries where the economy is contracting and unemployment growing is already vitreous and planting fears about a possible deposits grab in the future could shatter it completely.
Some will argue that the numbers involved in Cyprus are not that big, that small depositors will not lose a lot. This misses the point. Again, it’s not about the numbers, it’s about perceptions. Cypriot savers will not be so concerned about losing a few hundred euros here or there. After all, they know what’s going on in Greece and are aware that if they don’t pay a deposit levy, they’ll pay through higher taxes, lower wages and reduced spending. No, their worry will be about what’s going to come next. They have witnessed supposed partners back their country and its new president into a corner with almost underworld-style ruthlessness. The European Central Bank, essentially their central bank, threatened to cut off funding to Cypriot lenders, to cause their collapse, which would bring economic disaster. In these unprecedented circumstances, what basis is there for a relationship of trust between Cypriots and the eurozone? What’s to prevent them thinking that if they’ve been squeezed over this, they won’t be cornered over the island’s natural gas reserves or the terms for reunification with the Turkish-occupied north?
Others will argue that it is unfair to expect Germany or other eurozone taxpayers to keep footing the bill for bailing out member states. This also speaks of different perceptions of reality in the euro area. It ignores the fact that taxpayers in countries that have been bailed out are also paying a price. In fact, if one looks at the eurozone today and chooses any of its main economic indictors, it is abundantly clear who is footing the much higher cost for these rescue packages.
This emergence of parallel lives is the illness spreading to the heart of the single currency. How can the eurozone’s two parts understand each other when their realities are growing further apart? How can one side decide for the other when it’s not experiencing the depression, polarization and incertitude of its counterpart? In this two-tier construct, how can those on the upper deck assimilate the warnings from those below that the vessel is sinking, when their feet aren’t even wet?
That’s why Cyprus is about so much more than just numbers.