Cyprus is paying a painful price for bowing to international capital

Being controlled by global financial interests does not benefit ordinary people, their economy or democracy, writes the Jubilee Debt Campaign's Tim Jones.

A small country is being brought to its knees by a huge banking system which has recklessly been lent money from overseas. Controls on money leaving the country have had to be introduced. The size of the debts owed mean there is no way the government can simply bailout the banks. For Cyprus in 2013 read also Iceland in 2008.

Both small islands let themselves become home to casino banks many times the size of their actual economies. Banks borrowed money from overseas, lending it on again in even greater quantities. But when these loans could not be paid, the banks were bust, threatening the savings of all those with accounts in the banks, including normally Icelanders and Cypriots who had no idea their money was being put on a global roulette wheel.

In 2008, the Icelandic government could simply not afford to bailout its banks. Instead it sought to protect savings of domestic Icelanders, a limited bailout, whilst letting the reckless banks go bust to their foreign creditors. Iceland inevitably went through a crisis, but its economy is now growing, unemployment falling, and its experience measures favourably against that of Ireland, Spain and even the UK.

Iceland’s approach is a good lens through which to try to assess what is happening in Cyprus. The original plan of last week was madness, hitting domestic savers however small their savings. Now the deal rightly protects Cypriots who had been told by the EU that their deposits up-to €100,000 were safe.

Depositors over €100,000 will see their claims taken into a bad-bank, from which they could get back very little. Reckless lenders to banks via bonds will also take a hit on their loans, unlike under the original plan. This appears to be fair; there is no reason why Cypriot or other taxpayers should bailout reckless lenders such as rich Russians, hiding their money away in a secretive tax haven. In many ways it repeats the Icelandic experience. However, by hitting Cypriots as well as foreigners, it could have major ramifications for Cyprus’ businesses. It is also questionable whether the EU is only allowing this approach this time because it is rich Russians who are set to lose out, not German, French and British banks.

And so we come to the "help" from the EU through bailout loans. Cyprus’ government cannot afford to protect all the deposits under €100,000, even though the EU has brought in a collective rule to that effect. Not having its own currency, Cyprus has no ability to bring in inventive policies to keep money moving round the economy. But by taking €10 billion of loans from the EU and IMF, Cyprus is taking on a further debt of 60 per cent of national income, on top of the over 60 per cent already owed, and with national income set to crash. These loans are not payable, yet as with Greece, Portugal and Ireland today, or Africa and Latin America in the 1980s and 1990s, huge suffering is about to be imposed in the name of trying to pay.

True assistance from the EU would be to provide this support as grants, a policy which would be fair given that it is to protect the EU wide deposit protection policy, and necessary because of the existence of the single-currency. The European Central Bank could create the one-off money to do so, with no visible impact anywhere else.

Cyprus is not Iceland. The single currency, and the failure to discriminate between domestic and foreign lenders to banks, means the crisis for the Cypriot people is set to be far worse. The EU should be giving real help to prevent the destruction of the economy and many peoples lives.

Much debate in Cyprus has seemed to be driven by the fear of what will happen if all the foreign financiers leave. But it is the very same people who have driven the country into crisis. The controls on moving money out of Cyprus need to be rigorously enforced to give some protection, just as they were in Iceland, and in Argentina following its default in 2001, and Malaysia during the Asian Financial Crisis. Thankfully the EU is turning a blind eye to the Lisbon treaty which prevents all regulations on the movement of money between countries. But the pity is that other such regulations were not used to prevent the reckless lending into the country in the first place.

Regulations on the movement of money between countries were common-place in the decades after the second world war, a period when there were hardly any debt crises. After they began to be removed in the 1970s, such crises have become common place, affecting every continent from Latin America and Europe, to East and Central Asia and now Europe today.

The crisis in Cyprus shows how damaging the banking industry can be when it gets too large, just as in Iceland, Ireland, Spain and the UK. For the country to emerge from this crisis, Cyprus, like so many other countries, needs to get control over its banks in order to get them to invest in productive industries, rather than being part of a global speculation and tax avoidance ring.

Being controlled by global financial interests does not benefit ordinary people, their economy or democracy. Whilst Cyprus is going someway to making reckless lenders share in the pain, the failure to truly discriminate between domestic and foreign debts, and the lack of real help from the EU, means much suffering lies ahead.

Photograph: Getty Images

Tim Jones is policy officer at Jubilee Debt Campaign. Jubilee Debt Campaign is part of a global movement demanding freedom from the slavery of unjust debts and a new financial system that puts people first.

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Find the EU renegotiation demands dull? Me too – but they are important

It's an old trick: smother anything in enough jargon and you can avoid being held accountable for it.

I don’t know about you, but I found the details of Britain’s European Union renegotiation demands quite hard to read. Literally. My eye kept gliding past them, in an endless quest for something more interesting in the paragraph ahead. It was as if the word “subsidiarity” had been smeared in grease. I haven’t felt tedium quite like this since I read The Lord of the Rings and found I slid straight past anything written in italics, reasoning that it was probably another interminable Elvish poem. (“The wind was in his flowing hair/The foam about him shone;/Afar they saw him strong and fair/Go riding like a swan.”)

Anyone who writes about politics encounters this; I call it Subclause Syndrome. Smother anything in enough jargon, whirr enough footnotes into the air, and you have a very effective shield for protecting yourself from accountability – better even than gutting the Freedom of Information laws, although the government seems quite keen on that, too. No wonder so much of our political conversation ends up being about personality: if we can’t hope to master all the technicalities, the next best thing is to trust the person to whom we have delegated that job.

Anyway, after 15 cups of coffee, three ice-bucket challenges and a bottle of poppers I borrowed from a Tory MP, I finally made it through. I didn’t feel much more enlightened, though, because there were notable omissions – no mention, thankfully, of rolling back employment protections – and elsewhere there was a touching faith in the power of adding “language” to official documents.

One thing did stand out, however. For months, we have been told that it is a terrible problem that migrants from Europe are sending child benefit to their families back home. In future, the amount that can be claimed will start at zero and it will reach full whack only after four years of working in Britain. Even better, to reduce the alleged “pull factor” of our generous in-work benefits regime, the child benefit rate will be paid on a ratio calculated according to average wages in the home country.

What a waste of time. At the moment, only £30m in child benefit is sent out of the country each year: quite a large sum if you’re doing a whip round for a retirement gift for a colleague, but basically a rounding error in the Department for Work and Pensions budget.

Only 20,000 workers, and 34,000 children, are involved. And yet, apparently, this makes it worth introducing 28 different rates of child benefit to be administered by the DWP. We are given to understand that Iain Duncan Smith thinks this is barmy – and this is a man optimistic enough about his department’s computer systems to predict in 2013 that 4.46 million people would be claiming Universal Credit by now*.

David Cameron’s renegotiation package was comprised exclusively of what Doctor Who fans call handwavium – a magic substance with no obvious physical attributes, which nonetheless helpfully advances the plot. In this case, the renegotiation covers up the fact that the Prime Minister always wanted to argue to stay in Europe, but needed a handy fig leaf to do so.

Brace yourself for a sentence you might not read again in the New Statesman, but this makes me feel sorry for Chris Grayling. He and other Outers in the cabinet have to wait at least two weeks for Cameron to get the demands signed off; all the while, Cameron can subtly make the case for staying in Europe, while they are bound to keep quiet because of collective responsibility.

When that stricture lifts, the high-ranking Eurosceptics will at last be free to make the case they have been sitting on for years. I have three strong beliefs about what will happen next. First, that everyone confidently predicting a paralysing civil war in the Tory ranks is doing so more in hope than expectation. Some on the left feel that if Labour is going to be divided over Trident, it is only fair that the Tories be split down the middle, too. They forget that power, and patronage, are strong solvents: there has already been much muttering about low-level blackmail from the high command, with MPs warned about the dire influence of disloyalty on their career prospects.

Second, the Europe campaign will feature large doses of both sides solemnly advising the other that they need to make “a positive case”. This will be roundly ignored. The Remain team will run a fear campaign based on job losses, access to the single market and “losing our seat at the table”; Leave will run a fear campaign based on the steady advance of whatever collective noun for migrants sounds just the right side of racist. (Current favourite: “hordes”.)

Third, the number of Britons making a decision based on a complete understanding of the renegotiation, and the future terms of our membership, will be vanishingly small. It is simply impossible to read about subsidiarity for more than an hour without lapsing into a coma.

Yet, funnily enough, this isn’t necessarily a bad thing. Just as the absurd complexity of policy frees us to talk instead about character, so the onset of Subclause Syndrome in the EU debate will allow us to ask ourselves a more profound, defining question: what kind of country do we want Britain to be? Polling suggests that very few of us see ourselves as “European” rather than Scottish, or British, but are we a country that feels open and looks outwards, or one that thinks this is the best it’s going to get, and we need to protect what we have? That’s more vital than any subclause. l

* For those of you keeping score at home, Universal Credit is now allegedly going to be implemented by 2021. Incidentally, George Osborne has recently discovered that it’s a great source of handwavium; tax credit cuts have been postponed because UC will render such huge savings that they aren’t needed.

Helen Lewis is deputy editor of the New Statesman. She has presented BBC Radio 4’s Week in Westminster and is a regular panellist on BBC1’s Sunday Politics.

This article first appeared in the 11 February 2016 issue of the New Statesman, The legacy of Europe's worst battle