The Eurogroup's decision on Friday to impose a one-off tax on depositors in Cyprus may mark a turning point in the euro crisis. Only, the single currency's decision makers might soon realise that in taking this particular turn, they also ran out of road.
Under pressure from several members of the eurozone – Germany in particular, if reports are accurate – the new Nicosia government agreed that deposits above 100,000 euros would be taxed 9.9 percent and those under 100,000 at a rate of 6.75 percent.
This is an unprecedented decision for a eurozone country. It is also one whose potential consequences reach much further than an island in the eastern Mediterranean. It threatens to cause the transmission system between the economic and financial sectors on one side and the political and social on the other to seize up. Without this, the euro cannot be propelled forward. It cannot function.
The choice to tax depositors has prompted an intense economic debate about whether it was the correct policy or not. Both sides have put forward points worth considering. Those arguing against the decision have pointed, for instance, to the risk of contagion in other eurozone countries that are facing economic problems. Those who defend the Eurogroup's stance say depositors in Cyprus earned high interest, which gave them profits over the last few years and carried a bigger risk.
Setting these arguments aside, the eurozone ignores at its peril the fact that these decisions do not happen in an economic or financial vacuum. They have political and social consequences that cannot be ignored if the single currency is to have a future. One need only look at the political changes that have taken place in Greece, Ireland, Portugal, Spain, Italy and elsewhere to realize that the euro area is running out of leaders who have the backing needed to implement the decisions being taken.
Cypriot President Nicos Anastasiades, elected just last month, has to clarify to his people why he is adopting a bank deposit tax when he told voters a few weeks ago that he was absolutely opposed to it. Even before Anastasiades had returned from Brussels, his political opponents were demanding a referendum on the deposit tax. Some were even calling for new elections or an exit from the euro.
Anastasiades also has to explain to Cypriots why small-time depositors have to pay a similar levy to the one some eurozone countries supposedly demanded so alleged Russian oligarchs would be forced to pay for bailing out the island's banking system. Furthermore, he has to inform them why the Cypriot government's pledge to guarantee deposits up to 100,000 euros – supposedly even in the most extreme circumstances – is not even worth the paper it was written on.
The implications for people's trust in their government and financial system are obvious. It would be remiss to think that this wariness will be contained just to Cyprus. While many will be watching next week for signs of financial contagion from the Cypriot decision in other parts of the eurozone, with Spaniards or Italians possibly withdrawing savings from their banks, there is a more insidious infection that could spread.
Cypriots will be given equity in their banks in return for the tax but what value will this have when they no longer have faith in the banking system? Cypriots will be told that the deposit tax will stave off further measures but they only have to look to Greece or Portugal to see that promises of no more taxes or cuts have little value. They will be told that there was no alternative but then they will hear about pressure from other single currency members and concerns about the upcoming German elections.
And, all the time, citizens in other troubled eurozone countries will watch and grow warier. They will interpret the policies advocated by the stronger members as punitive for the weaker. They will consider the hypocrisy of leaders who cry foul about money laundering in Cyprus but turn a blind eye if it is happening in Lichtenstein, Switzerland, Luxembourg, the City of London or anywhere else in Europe. They will realize that their government’s promises carry no value when measured against the ideas, motives or obsessions of the single currency’s big players.
This is the point at which the political and social sectors will experience a complete disconnect from the economic and financial. Restoring the connection will be an immense task.
Then, these same citizens will begin to ask themselves where their interests lie, what’s in the euro for them and whether other options would be better. And, as they are mulling over these thoughts, they will look to other parts of Europe and see people like them but also analysts and policy makers wondering what all the fuss is about. They will hear others who have not had to suffer any hardship or financial losses wonder why there is such a negative reaction to wages being slashed, taxes being hiked or deposits being taxed.
This is the point at which the links within the eurozone will begin to pop apart, when citizens will turn to Beppe Grillo-style solutions, to nationalists, extremists or to anyone who promises a different path.
This is the point at which the vehicle stops functioning and the road ends.
Nick Malkoutzis is deputy editor of the Greek English-language daily Kathimerini, where this post first appeared. He blogs at Inside Greece. Follow him on Twitter @NickMalkoutzis.