Cyprus isn't something happening "over there"

Europe – and that includes Britain – is unavoidably connected.

In case anyone thought that the bank and sovereign debt crisis that has engulfed certain parts of the eurozone has produced all its dramatic twists, events this weekend came as a rude awakener.

Eurozone leaders agreed early on Saturday morning a deal to bailout and restructure the Cypriot banking sector.

The most controversial part of the deal sees a tax levied on depositors to raise about 5.8 billion euros, to add to the €10 billion committed by the Eurozone and (probably) IMF. A 9.9 per cent levy will be imposed to deposits over 100.000, while deposits below 100.000 will face a levy of 6.75 per cent.

So for the first time depositors, who were considered sacrosanct until now, are forced to share the cost of a bail-out.

A lot has been said about how this decision was reached. The blame shifts depending who one talks to, but the Financial Times give a good account. It seems that considerations about the future of Cyprus as an off-shore financial centre played a role when deciding how widely to spread the pain among depositors in Cypriot banks. It was feared that taxing only non-resident depositors would scare investors away.

So the main bone of contention (in an overall contentious decision) is that smaller depositors are put on the firing line, in a move that is seen as unfair and dangerous. Asking working people and pensioners to sacrifice their savings in the service of a failed banking sector is indeed cruel. But WSJ’s Simon Dixon makes a fair point, there is an element of fairness when asking locals to contribute to the bail out of their country’s banking sector, especially when that sector represents such a huge part of the country’s economy.

Many argue that it should not have come to this at all, that depositors should have been spared all together. But as Hugo Dixon of Reuters argues the Eurozone and the Cypriot government had very little choice. Imposing a haircut on government debt, like it was done in Greece’s case, was not possible because most of the country’s sovereign debt is held under English law (making a Greek-style restructuring hard) and the remaining is held by Cypriot banks, making a hair-cut self-defeating.

Hence the decision to impose a tax on depositors, many of whom are non-resident, predominately Russian and in many cases suspect of money-laundering. It would have been a hard task politically to explain to taxpayers across the Eurozone why they should contribute more to a bail-out that would have, to some extent, helped Russian oligarchs.

The most important thing that one should consider is what would be the cost of an alternative. In the absence of a bail-out deal (one that the Cypriot government had delayed long enough) Cypriot banks (which are already under ECB life-support) would collapse, taking the Cypriot economy with them. Lest we forget that the banking sector in Cyprus is more than 5 times the Cypriot economy.

The one good thing that can come out of this is the de facto reduction of Cyprus’ banking sector to a size closer to the EU average, as the Eurogroup statement, that followed the bailout agreement, calls for. As we have seen in other European countries like Ireland and the UK, an oversized financial sector holds huge risks for the host country, especially for one whose economy is as small as that of Cyprus. To a large extent this is a banking crisis, rather than a “euro-crisis” and no matter what the structural inefficiencies of Eurozone’s governance (and European politicians inability so far to separate bank from sovereign debt) what Cyprus is faced with is the collapse of a banking sector that grew too big for its own good and made far too many bad decisions.

There is still a lot to play for, not least a parliamentary vote to approve the bail-out deal. Until then there is time and room to reconsider how the burden will be spread among depositors, and there are many proposals on the table on how to shield small depositors and reduce their contribution to the bail-out pot of money. Some reports talk about reducing to 3 per cent the levy imposed to deposits up to €100.000.

One last thing. The situation in Cyprus shows that in an interconnected world we are not immune to what happens “over there”. Capital as well as people are mobile, the banking sector interconnected and as a result banks and people’s savings are affected, irrespectively whether we are part of the Eurozone or not. The fact that British citizens who live and hold deposits in Cyprus will have to be part of the bail-out levy shows how important it is for the British government to be as involved as possible in Eurozone governance and EU-wide efforts to address the systemic faults of Europe’s financial sector.

Photograph: Getty Images

Petros Fassoulas is the chairman of European Movement UK

Photo: Getty Images
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The Fire Brigades Union reaffiliates to Labour - what does it mean?

Any union rejoining Labour will be welcomed by most in the party - but the impact on the party's internal politics will be smaller than you think.

The Fire Brigades Union (FBU) has voted to reaffiliate to the Labour party, in what is seen as a boost to Jeremy Corbyn. What does it mean for Labour’s internal politics?

Firstly, technically, the FBU has never affliated before as they are notionally part of the civil service - however, following the firefighters' strike in 2004, they decisively broke with Labour.

The main impact will be felt on the floor of Labour party conference. Although the FBU’s membership – at around 38,000 – is too small to have a material effect on the outcome of votes themselves, it will change the tenor of the motions put before party conference.

The FBU’s leadership is not only to the left of most unions in the Trades Union Congress (TUC), it is more inclined to bring motions relating to foreign affairs than other unions with similar politics (it is more internationalist in focus than, say, the PCS, another union that may affiliate due to Corbyn’s leadership). Motions on Israel/Palestine, the nuclear deterrent, and other issues, will find more support from FBU delegates than it has from other affiliated trade unions.

In terms of the balance of power between the affiliated unions themselves, the FBU’s re-entry into Labour politics is unlikely to be much of a gamechanger. Trade union positions, elected by trade union delegates at conference, are unlikely to be moved leftwards by the reaffiliation of the FBU. Unite, the GMB, Unison and Usdaw are all large enough to all-but-guarantee themselves a seat around the NEC. Community, a small centrist union, has already lost its place on the NEC in favour of the bakers’ union, which is more aligned to Tom Watson than Jeremy Corbyn.

Matt Wrack, the FBU’s General Secretary, will be a genuine ally to Corbyn and John McDonnell. Len McCluskey and Dave Prentis were both bounced into endorsing Corbyn by their executives and did so less than wholeheartedly. Tim Roache, the newly-elected General Secretary of the GMB, has publicly supported Corbyn but is seen as a more moderate voice at the TUC. Only Dave Ward of the Communication Workers’ Union, who lent staff and resources to both Corbyn’s campaign team and to the parliamentary staff of Corbyn and McDonnell, is truly on side.

The impact of reaffiliation may be felt more keenly in local parties. The FBU’s membership looks small in real terms compared Unite and Unison have memberships of over a million, while the GMB and Usdaw are around the half-a-million mark, but is much more impressive when you consider that there are just 48,000 firefighters in Britain. This may make them more likely to participate in internal elections than other affiliated trade unionists, just 60,000 of whom voted in the Labour leadership election in 2015. However, it is worth noting that it is statistically unlikely most firefighters are Corbynites - those that are will mostly have already joined themselves. The affiliation, while a morale boost for many in the Labour party, is unlikely to prove as significant to the direction of the party as the outcome of Unison’s general secretary election or the struggle for power at the top of Unite in 2018. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.