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Nikos Chrysoloras: Why we should be cautious about cheering on Cyprus’ no vote

“A version of this article was published in the Guardian today”

Just when observers were starting to get bored, the Eurozone debt crisis took a dramatic twist again, and everyone is back on the edge of their seats, waiting to see if the Continent will eventually die of its self-inflicted wounds. The unfolding drama could not have been more surrealist: on the one hand, the far left and the Eurosceptic right rejoiced about the “valiant No” of the Cypriot parliament to a deal that would ensure the financing of the cash-strapped Cypriot economy from the Eurozone and the IMF.

The detail many seem to miss is that Cypriots did not reject harsh austerity measures. These measures had already been agreed by the previous – supposedly communist – government of the island, and were approved by the current administration. They did not even revolt against an unjust levy on retail deposits. The Eurozone had already signaled its agreement to spare those, on the condition that assets belonging to foreign oligarchs and tycoons will be subjected to significant haircut (15.6%). Indeed, it was the Cypriot government that rejected this option, in a dramatic ten hours long Eurogroup meeting, last Friday, because it would damage the sprawling financial sector of the country. So the main demand of the parliamentary revolt we saw live on our news channels’ screens, was that Cyprus remains an offshore financial haven. In exchange for this, it seemed that the Cypriot government was even willing to offer so many concessions to Moscow that would turn the island into an overseas Russian territory. Why anyone would celebrate for all this is really beyond comprehension.

On the other side of the Continent, in Brussels, the people managing the world’s second largest economy showed once again a ridiculous lack of leadership skills. First, they concluded and defended a deal that would violate the sanctity of retail deposits. Then, when it was pointed out to them that this is catastrophic, they started pointing the finger towards one another, about whose idea it was. When they decided to backtrack, it was already too late. It is true that the deal has so far only caused a bank run and an unbelievable geopolitical mess in Cyprus, a small country which, according to Berlin, is not “systemically important”. But markets and people know already that next time there is a crisis in Italy, Spain, or elsewhere, the Eurozone is willing to cross the Rubicon. This is a disaster of unimaginable proportions.

All this should not come as a surprise to anyone who is following the Brussels bubble. Suffices to say that the only reason that Jeroen Dijsselbloem was chosen to run the all-powerful Eurogroup, i.e. council of finance ministers of the Eurozone, is not his technical knowledge (he has none), nor his ministerial and administrative experience (he barely has any), but the fact that he is Dutch. All other, more reliable, options were excluded because of their nationality. Unbelievable as it may sound, this is how things are being run here in Brussels…

So, what could have happened? How could the Cypriot crisis have been resolved? First of all, there was no reason whatsoever to ask from a small nation to deliver 20% of its GDP upfront in cash, within three days. Such outrageous request had not been made to any other bailed out country and it ridiculed the pro-European government of the island in the eyes of its people. Second, it was not Cypriot national debt which was unsustainable, but the country’s banks. And there was a solution to that: after wiping out shareholders and junior bondholders, and imposing a haircut to senior bondholders, the European Stability Mechanism could have taken over the Cypriot banks. It could then gradually shrink them and put them in a resolution course, while giving the time to Cyprus to find alternatives to its finance industry-based business model. This option theoretically exists (it was decided by an EU Summit last June), but the legal modalities are not there yet to implement it, because Germany has since changed its mind. Cyprus could, in exchange for this arrangement, securitize future revenues from its gas reserves and offer them as guarantees, together with a strict fiscal consolidation programme.

Similarly, two years ago, the European Central Bank could have decided to guarantee all sovereign bonds in the Eurozone, like it did with its co-called “Outright Monetary Transactions” Programme last September, subject to the implementation of a stabilization policy by the beneficiary countries. Instead, Greece’s private debt was transferred to European taxpayers, causing animosity between the peoples of Europe, and the country essentially defaulted, thus increasing uncertainty and deepening recession in the Continent.

Once again, the decisions made over the last days will just perpetuate the crisis. Capital outflows towards the core will continue and the single market will keep breaking apart, making the costs of a euro dissolution more manageable. Also, although it is too early to say what will happen to Cyprus and its depositors, British or otherwise, one thing is for certain: the Eurozone, an aspiring global player, is offering a Mediterranean outpost of strategic significance, as a present to the Russians. It is just up to Moscow to decide whether it will accept it or not. And the Cypriot “No” will ridicule pro-European elites in Greece and elsewhere, as it will appear that there was an ideal alternative, but it was ignored by the “puppies of Merkel”. By the time that people realize that the alternative is far from ideal, it may already be too late.

The obvious question is why. Why Germany and other northern European countries act as if they want to destroy the Eurozone, instead of fixing it? My humble opinion is that there is a deep-rooted implicit racism in their actions. Their political discourse implies that all wealth accumulated in Northern Europe is the virtuous reward of protestant work ethic, while all wealth accumulated in the South is a product of corruption (Greece, Italy), tax evasion (Cyprus), or unsustainable business models (Spain). That is why southern European countries are being asked to change their economic models and correct their deficits not gradually, in the context of a Eurozone unification and convergence process, but in such violent and punishing way that it risks tearing societies apart.

The inconvenient truth is of course that it was not too long ago that Finland was almost bankrupt and there are still people old enough to remember Germany’s own debt restructuring. “Our finest and blondest friends” (as Blackadder would say) in the North should realize that not all depositors in their banks, which were bailed out during the last two years with taxpayers’ money, had paid their taxes. Indeed, it is certain that some of these depositors were arms dealers, drug traffickers, or even Russians. And from small time crooks, like the countless German politicians who have plagiarized in their PhD theses, to big time criminals, like the German industrial flagship, which was bribing Greek governments in exchange for contracts, Northern Europe has its own fair share of corruption. Most importantly, there is not a single academic study that has concluded that Northern Europe did not gain at least as much from the Euro, as Southern Europe. If these truths are not somehow communicated to the North, then not only Eurozone will collapse, but the ghosts of the past will come to life…

Dr. Nikos Chrysoloras is a Brussels-based EU Correspondent for the Greek and Cypriot broadsheet “Kathimerini” and a Research Associate of the Crisis Observatory.