"It must realise its current business model is dead"

Merkel on Cyprus.

Merkel summed up the situation earlier this morning in Cyprus, via Reuters.

She's right - when Cyprus gave in to political pressure and decided to ditch the levy on small savers, it also said goodbye to its economic structure. If it had taxed under $100,000 depositors, it may have been able to maintain its weird, top-heavy banking sector fuelled by Russian oligarchs. It's too late now though. Cyprus's solutions are falling away fast - today's news was that Russia is really, really unlikely to come to Cyprus's aid.

Cyprus's banking system is odd though. At times it has done well - back before the financial crisis, Cyprus was described by the International Monetary Fund as going through a "long period of high growth, low unemployment, and sound public finances" - but it this wasn't sustainable. Here's the Telegraph's Rachel Cooper on what happened next:

By 2011, the IMF reported that the assets of Cypriot banks were equivalent to 835pc of annual national income. Some of that was down to investment by foreign-owned banks, but most was Cypriot.

This imbalance might have been sustainable had the country’s two largest banks not made loans to the Greek government worth 160pc of Cypriot GDP.

When the value of the debts owed by the Greek state was cut by 75pc, the Cypriot banks were hit hard. Cyprus became stuck in a familiar negative cycle: already weak government finances were further ravaged by slow economic growth and the turmoil in the eurozone.

It will be painful, but in the long run the dismantling of Cyprus's financial foundations may be no bad thing.

Angela Merkel. Photograph: Getty Images
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Richmond is a wake-up call for Labour's Brexit strategy

No one made Labour stand in Richmond Park. 

Oh, Labour Party. There was a way through.

No one made you stand in Richmond Park. You could have "struck a blow against the government", you could have shared the Lib Dem success. Instead, you lost both your dignity and your deposit. And to cap it all (Christian Wolmar, take a bow) you self-nominated for a Nobel Prize for Mansplaining.

It’s like the party strategist is locked in the bowels of HQ, endlessly looping in reverse Olivia Newton John’s "Making a Good Thing Better".

And no one can think that today marks the end of the party’s problems on Brexit.

But the thing is: there’s no need to Labour on. You can fix it.

Set the government some tests. Table some amendments: “The government shall negotiate having regard to…”

  • What would be good for our economy (boost investment, trade and jobs).
  • What would enhance fairness (help individuals and communities who have missed out over the last decades).
  • What would deliver sovereignty (magnify our democratic control over our destiny).
  • What would improve finances (what Brexit makes us better off, individually and collectively). 

And say that, if the government does not meet those tests, the Labour party will not support the Article 50 deal. You’ll take some pain today – but no matter, the general election is not for years. And if the tests are well crafted they will be easy to defend.

Then wait for the negotiations to conclude. If in 2019, Boris Johnson returns bearing cake for all, if the tests are achieved, Labour will, and rightly, support the government’s Brexit deal. There will be no second referendum. And MPs in Leave voting constituencies will bear no Brexit penalty at the polls.

But if he returns with thin gruel? If the economy has tanked, if inflation is rising and living standards have slumped, and the deficit has ballooned – what then? The only winners will be door manufacturers. Across the country they will be hard at work replacing those kicked down at constituency offices by voters demanding a fix. Labour will be joined in rejecting the deal from all across the floor: Labour will have shown the way.

Because the party reads the electorate today as wanting Brexit, it concludes it must deliver it. But, even for those who think a politician’s job is to channel the electorate, this thinking discloses an error in logic. The task is not to read the political dynamic of today. It is to position itself for the dynamic when it matters - at the next general election

And by setting some economic tests for a good Brexit, Labour can buy an option on that for free.

An earlier version of this argument appeared on Jolyon Maugham's blog Waiting For Tax.

Jolyon Maugham is a barrister who advised Ed Miliband on tax policy. He blogs at Waiting for Tax, and writes for the NS on tax and legal issues.