Cyprus: has the eurozone run out of road?

After the bank levy, citizens will lose confidence in the system and turn to extreme political alternatives.

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.

A souvenir shop in Nicosia, Cyprus, on 17 March. (Photo: Getty.)
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Jeremy Corbyn's won a monumental victory - but it's more delicate than it looks

The need for peace on the left is overwhelming. 

It is perverse, absurd even, that in the aftermath of such a monumental victory Jeremy Corbyn must immediately talk of coalition building and compromise. Previous winners of internal struggles – most notably Tony Blair and Neil Kinnock – certainly did nothing of the sort, and Corbyn’s victory is bigger than theirs. To an extent, this is not the victory of one set of ideas but the establishment of a new party altogether – with a completely different centre of gravity and an almost completely new membership. 

That new Labour party – and core project that has built around Corbyn’s leadership – is itself a delicate network of alliances. The veterans of big social movements, from the Iraq War to the anti-austerity protests of 2011, find themselves in bed with left-leaning cosmopolitan modernisers and the reanimated remnants of the old Labour left. All parts of the coalition have reason for hubris, to believe that this new formation – complex enough as it is already, and filled with ideas and energy – can carry the Corbyn project into Number 10 with or without the co-operation of his Labour colleagues and the wider left. 

That vision is a mirage. Labour has undergone the biggest membership surge in its history, and is now the biggest left of centre party in Europe. As John Curtis has pointed out, the party’s support has maintained a high floor relative to the level of infighting and sniping over the summer, in part because of Corbyn’s strong appeal to Labour’s base. But the bleak electoral outlook, compounded by boundary changes, requires us to do more than read out lines from pre-written scripts. We must all, from a position of strength, stare death in the face.

The terms of peace with the Labour right must be negotiated carefully. There can be no negotiating away of internal democracy in the selection of candidates or national policy-setting; doing so would permanently weaken the left’s hand and allow Corbyn’s detractors in parliament to run riot. And in policy terms, Corbyn cannot compromise basic anti-austerity principles – not just because doing so would be a betrayal that would demobilise Labour’s new base, but because the project of triangulation pioneered by Ed Milliband is a tried and tested electoral failure. 

And yet the need for peace is overwhelming. At a grassroots level, Owen Smith’s support was not made up of hardened Blairites. Many of them, unlike Smith himself, really did share Corbyn’s political vision but had been ground down and convinced that, regardless of the rights and wrongs, there could be no end to Labour’s civil war without new leadership. The left’s job is to prove those people, and the politicians who claim to represent them, wrong. 

Labour’s assorted hacks – on left and right – often forget how boring and irrelevant the search for Labour’s soul looks to a wider public that long ago left behind party tribalism. The intellectual task ahead of us is about framing our politics in a comprehensible, modernising way – not creating a whole new generation of people who know Kinnock’s 1985 conference speech by rote. 

A united Labour Party, free to focus on shifting the consensus of British politics could well change history. But the grim realities of the situation may force us to go even further. To get a majority at the next election, Labour will need to gain 106 seats – a swing not achieved since 1997. 

Add to that the socially conservative affirmation of the Brexit vote, and the left’s profound confusion in terms of what to do about it, and the challenge of getting a Labour Prime Minister – regardless of who they are or what they stand for – looks like an unprecedented challenge. That unprecedented challenge could be met by an unprecedented alliance of political forces outside the Labour party as well as inside it. 

In order for Labour to win under the conditions set by the boundary review, everything has to be calibrated right. Firstly, we need an energised, mass party which advocates radical and popular policies. Secondly, we need the party not to tear itself apart every few months. And yes, finally, we may well need an honest, working arrangement between Labour, the Greens, and other progressive parties, including even the Lib Dems. 

Exactly how that alliance would be constituted – and how far it would be under the control of local parties – could be the matter of some debate. But there is every chance of it working – especially if the terms of the next general election take place in the context of the outcome of a Brexit negotiation. 

The starting point for that journey must be a recognition on the part of Corbyn’s opponents that the new Labour party is not just the overwhelming democratic choice of members, but also – with a mass activist base and a mostly popular programme – the only electable version of the Labour party in the current climate. For the left’s part, we must recognise that the coalition that has built around Corbyn is just the core of a much wider set of alliances – inside Labour and perhaps beyond.