The EU prophesies world economic doom if a single member should desert the euro zone.

By Gary Scarrabelotti^*

To understand what is really going on in Cyprus we need to see clearly what is at stake: the survival of an empire. 

Yes, the European Union (EU) is an empire.  Empire building is the perennial temptation of humankind — and especially of the Europeans, from Alexander the Great to Adolf Hitler.  But the EU is a new kind of empire.  It is not held together, ultimately, by an imperial army – or navy.  An imperial currency, an imperial bank — the European Central Bank, and a set of imperial financial norms imposed upon those who accept the imperial coin: these constitute the underlying fabric of empire. 

Countries on the periphery of the EU — which, for cultural and moral reasons, have the most troubled economies and so suffer the greatest discontents — are open to brutal disciplinary incursions from the centre to hold them in their place. 

Suppressing the natives

Unlike in times past when imperial generals and their legions spread before them fire and sword, the new invasion comes in the form of be-suited high bureaucrats and bankers.   Breathing threats of economic obliteration upon those who lose the imperial faith, they come armed with the power to enslave by forced indebtedness those alienated from the imperial financial order. 

This is done easily enough.  Tedious negotiations; a lot of late nights; plenty of street theatre, some of it violent: this is minor stuff, really, in the annals of imperial statecraft.   Fear of economic Armageddon works wonders upon the minds of modern populations habituated to the largesse of the welfare state.  Dread of losing it permanently — and misplaced hopes of a return to the way things were — bends them, willingly if unhappily, to debt servitude. 

Greece’s debt-to-GDP ratio rocketed from 130 per cent in 2009, when the Greek problem first became evident, to 176 per cent today.  The increase is mainly the work of the EU’s “bailout”. 

The very best that the Greeks can hope for — if (incredibly) everything goes to plan — is that the debt-to-GDP ratio will stand at 120 per cent in 2020. A nation compelled by external political forces to assume burdens like this has ceased to exist as an independent entity. 

When one considers how the Greeks got into this mess it’s easy to feel unsympathetic.  Yet the misery of suddenly impoverished millions and the abject humiliation of a nation, excite compassion in any half decent soul. 

In those, however, who see it as their civilising mission to the world to hold together the EU’s weird empire of money, “the bowels of compassion” have no place.  The rot has to be stopped at the periphery lest contagion spread to the centre and the whole collapse. 

Fearmongers

In a very real sense the EU is holding a gun to all our heads: it threatens that the world economy will go up in flames if but a single member should desert the euro zone.  This “Sum of All Fears” jeremiad is more bogey man than substance. 

In December 1991 the Soviet Union collapsed.  It had been a monetary union.  But, as 15 newly independent nations peeled away from Russia, a single currency (the rouble) was replaced by 16 new currencies.   The 16 nations born (or reborn) from the Soviets’ disintegration did not go up in smoke and Russia itself has emerged as one of the better performing economies in the world with huge prospects for future growth.    

So let’s not be taken in by the Euro-propaganda about global meltdown. Yes, there would be risks in managing a country’s exit from the euro zone. The break-up, however, of the old Soviet currency union, though bruising along the way, has proved a highly successful enterprise and that fact should put paid to any notion that orderly exits from the euro are unthinkable. 

The only reason why it is unthinkable is that the European political élite are imperialists: the empire must not fail.  The dream of being a United States of Europe and the equal of the USA – combined with guilt-ridden fears of national identity — holds the European élite in its thrall. To defend the centre, therefore, the periphery can burn.  Cyprus is the latest victim of this strategy.  But the Cyprus case illustrates how desperate and wildly misjudged EU policy has become as its refusal to let a single euro zone member go rapidly approaches its point of exhaustion. 

The perennial temptation of empire. (Bruegel the Elder, The Tower of Babel, 1563, Kunsthistorisches Museum, Vienna.)

In order to raise the €5.8 billion to qualify for an EU bailout loan of €10 billion, €4.2 billion will be raised by a levy upon Cyprus bank depositor accounts.  At first, every account was to be hit and senior bondholders were to get off scot free.  But that shocking proposal fell apart when the Cypriots erupted in anger and the Cyprus parliament, justly terrified by popular outrage, unanimously rejected the deal.  On the second attempt, which now seems in place, only accounts with balances above €100,000 will have to pay; and not only big depositors but also senior bondholders will be slugged.  As of writing, how much they will lose is unclear, but the Cyprus government has mentioned a figure in the vicinity of 30 per cent.  Some hit. 

Targeting bondholders is one thing, but carrying off depositors’ “hard earned” is another.  The brains behind the EU think they can get away with confiscating money from large depositor accounts because a lot of that money, they say, is held by “bad” guys: that is, rich Russians and Russian businesses that are using Cyprus bank vaults to store their, allegedly, ill-gotten gains. 

Leaving aside the laughable idea that there’s not a single honest Russian kopek stashed in Cypriot banks, what about the Americans, British, Canadians, and Europeans, whether private persons or corporations, who manage their affairs from Cyprus?  It’s OK raid their accounts too? 

Well, yes, apparently it is.  Still, the idea is seriously flawed. 

First, it sends a signal to other Europeans that, if banks in their own countries get into strife and the EU has to ride to the rescue, then their savings will be confiscated too.  

The Dutch finance minister, Jeroen Dijsselbloem, chairman of the euro zone group of finance ministers, confirmed this suspicion when he told Reuters the other day that Cyprus is the model for future bailouts:

“If there is a risk in a bank, our first question should be ‘Okay, what are you in the bank going to do about that? What can you do to recapitalize yourself?’ If the bank can’t do it, then we’ll talk to the shareholders and the bondholders, we’ll ask them to contribute in recapitalizing the bank, and if necessary the uninsured deposit holders.”

In other words, the Cyprus “rescue” warns other Europeans – especially Italians and Spaniards, but also Slovenes and Luxembourgers whose countries have banking sectors which dwarf that of Cyprus — to start withdrawing money from their own banks before there’s any sudden turn for the worse. 

Do not feed the Bear!

Secondly, European leaders have blundered badly if they think they can get away with confiscating Russian money.  Even if the Russians, for the time being, were to “cop it sweet” over Cyprus, they are not likely to forget.  Suppose Russian doubloons buried deep in Cyprus have been pirated, they remain Russian doubloons. In one way or another, in one form or another, someday, the Russians will expect to get them back.  

Here’s something else worth thinking about.  The EU rescue of Cyprus is not only about stamping out financial contagion at its peripheral source.  It’s also about blocking the Russians in Cyprus.  The Ruskis are back in the Mediterranean and they plan to stay.  There’s a nice little, under-utilised  naval base on the southern Cyprus coast near the town of Zygi: the Evangelos Florakis base. It’s quite handily located for the Russians if they lose their Tartus base in Syria. The last thing that the EU (and NATO) wants is for Russia to strengthen its position in Cyprus. 

The Russians, however, are likely to come out of this mess a winner.  They have not wanted to do more for their Orthodox cousins, the Greek Cypriots, beyond what they’ve done already: which is to make them a low-interest €2.5 billion loan.  Sure, Russian president, Vladimir Putin, might obligingly offer more generous terms on said loan. But why do more?  If the EU is determined to “save” Cyprus, then let them.  They will wreak havoc on the economy.  Meantime, without risking a rouble more than is strictly necessary, the Russians will stay in the Cyprus game as a friendly benefactor of the government and people. 

Perhaps one day, maybe no so far away, a cash-strapped Cyprus government would be only too happy to lease a naval base to so simpatico a friend.    

Buona Pasqua, Europa!

^{*Gary Scarrabelotti is the Director of Canberra-based business Aequum: political & business consulting. This article was also published on the HenryThornton blog}