Cyprus counterintuition part two: "Britain's next"

Are we heading down the same road?

I've already touched on one counterintuitive claim about Cyprus – that, far from being the Germans crushing the little guy, a wealth tax is actually the most progressive way out of the hole – but here's another one: Cyprus isn't that unique at all.

The Independent's Ben Chu turns against the prevailing trend, which is to argue that Cyprus, with its massive influx of questionable foreign funds, extended and deliberate exposure to Greek banks, tiny and inflexible economy, and a currency which it has no say in, is one-of-a-kind. Instead, Chu argues, there's someone who should be watching carefully: us.

We’ve nothing to be smug about here in Britain.

This chart (below) from Albert Gallo, an analyst at RBS, shows that we’re not that far behind. Despite all the deleveraging of recent years our banking sector still has assets and liabilities equal to 450% of our GDP.

Remember this next time you hear from one of the banking industry lobbyists how vital it is for the UK’s economic future to have a massive banking sector. Remember Cyprus.

Chu is slightly channeling Osborne, there (which isn't a nice thing to say of anyone, and I'm sorry). Our Chancellor made one of the earlier comments comparing Britain to Cyprus, and was pilloried for it. To be fair to Chu, Osborne's claim, that Cyprus is "what happens if you don’t show the world that you can pay your way" and is why Britain has "got to retain the confidence of world markets", is utter nonsense, while Chu's point is more interesting.

The problems in Cyprus have literally nothing to do with retaining the confidence of the world markets. Instead, have to do with buying a crapload of Greek debt in 2007, and then having a banking sector which owes billions in a currency Cyprus doesn't control.

On the face of it, that's not a circumstance which applies to Britain either. But the other aspect of the Cypriot problem is that the size of the country's banks is completely out of proportion two the size of the country's economy, and, yes, the UK's banking sector is similarly bloated – though still only half the size of Cyprus's as a proportion of GDP. I made a similar comparison in the heady days of 2011, pointing out that the UK is more similar to pre-crisis Iceland than Greece.

But the comparison just doesn't hold water beyond that. Because Cyprus's problem isn't just a bloated banking sector – it's also all those stupid moves its banking sector made, and the fact that Cyprus doesn't actually control the currency it now needs to recapitalise the banks into. (It's also, more technically, the fact that most of Cyprus's domestic law bonds are held by the Cypriot banks, which renders a partial default counter-productive). As a result, the real comparison between the UK and Cyprus is this one, from the FT's Joseph Cotterill:

That's the cost of fixing the banks' mistakes as a proportion of GDP. Cyprus is having to spend 60 per cent of its GDP on that. For comparison, that is roughly equal to America having to spend $9trn, almost 400 times the cost of TARP.

Cyprus is in a uniquely shitty situation. It's a cautionary tale for having banking debt's seven times higher than GDP, but it's more a cautionary tale about not being Cyprus.

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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An Irish Sea border – and 3 other tricky options for Northern Ireland after Brexit

There is no easy option for Northern Ireland after Brexit. 

Deciding on post-Brexit border arrangements between Northern Ireland and the Irish Republic is becoming an issue for which the phrase "the devil is in the detail" could have been coined. Finding a satisfactory solution that delivers a border flexible enough not to damage international trade and commerce and doesn’t undermine the spirit, or the letter, of the Good Friday Agreement settlement is foxing Whitehall’s brightest.

The dial seemed to have settled on David Davis’s suggestion that there could be a "digital border" with security cameras and pre-registered cargo as a preferred alternative to a "hard border" replete with checkpoints and watchtowers.

However the Brexit secretary’s suggestion has been scotched by the new Irish foreign minister, Simon Coveney, who says electronic solutions are "not going to work". Today’s Times quotes him saying that "any barrier or border on the island of Ireland in my view risks undermining a very hard-won peace process" and that there is a need to ensure the "free movement of people and goods and services and livelihoods".

The EU’s chief Brexit negotiator, Michel Barnier, has made dealing with the Irish border question one of his top three priorities before discussions on trade deals can begin. British ministers are going to have to make-up their minds which one of four unpalatable options they are going to choose:

1. Hard border

The first is to ignore Dublin (and just about everybody in Northern Ireland for that matter) and institute a hard border along the 310-mile demarcation between Northern Ireland and the Irish Republic. Given it takes in fields, rivers and forests it’s pretty unenforceable without a Trump-style wall. More practically, it would devastate trade and free movement. Metaphorically, it would be a powerful symbol of division and entirely contrary to the spirit of the Good Friday Agreement. The Police Federation in Northern Ireland has also warned it would make police officers "sitting ducks for terrorists". Moreover, the Irish government will never agree to this course. With the EU in their corner, there is effectively zero chance of this happening.

2. Northern EU-land

The second option is to actually keep Northern Ireland inside the EU: offering it so-called "special status". This would avoid the difficulty of enforcing the border and even accord with the wishes of 56 per cent of the Northern Irish electorate who voted to Remain in the EU. Crucially, it would see Northern Ireland able to retain the £600m a year it currently receives from the EU. This is pushed by Sinn Fein and does have a powerful logic, but it would be a massive embarrassment for the British Government and lead to Scotland (and possibly London?) demanding similar treatment.

3. Natural assets

The third option is that suggested by the Irish government in the Times story today, namely a soft border with customs and passport controls at embarkation points on the island of Ireland, using the Irish Sea as a hard border (or certainly a wet one). This option is in play, if for no other reason than the Irish government is suggesting it. Again, unionists will be unhappy as it requires Britain to treat the island of Ireland as a single entity with border and possibly customs checks at ports and airports. There is a neat administrate logic to it, but it means people travelling from Northern Ireland to "mainland" Britain would need to show their passports, which will enrage unionists as it effectively makes them foreigners.

4. Irish reunification

Unpalatable as that would be for unionists, the fourth option is simply to recognise that Northern Ireland is now utterly anomalous and start a proper conversation about Irish reunification as a means to address the border issue once and for all. This would see both governments acting as persuaders to try and build consent and accelerate trends to reunify the island constitutionally. This would involve twin referendums in both Northern Ireland and the Republic (a measure allowed for in the Good Friday Agreement). Given Philip Hammond is warning that transitional arrangements could last three years, this might occur after Brexit in 2019, perhaps as late as the early 2020s, with interim arrangements in the meantime. Demographic trends pointing to a Catholic-nationalist majority in Northern Ireland would, in all likelihood require a referendum by then anyway. The opportunity here is to make necessity the mother of invention, using Brexit to bring Northern Ireland’s constitutional status to a head and deal decisively with the matter once and for all.

In short, ministers have no easy options, however time is now a factor and they will soon have to draw the line on, well, drawing the line.

Kevin Meagher is a former special adviser at the Northern Ireland Office and author of "A United Ireland: Why unification is inevitable and how it will come about"

Kevin Meagher is associate editor of Labour Uncut and a former special adviser at the Northern Ireland office.