The Turning Point of the Crisis

Europe has just reached the turning point of the crisis. Now it can be better or worse – it all depends on what will happen in Cyprus.

At first glance, the conditions which IMF and the European Union offered the government of Cyprus in return for saving the banking sector are reasonable and just. If the owners of deposits were the main victims of the bankruptcy of insular banks, it should be them to be the most interested in the ways to avoid it. If the guarantee fund is only 100,000 euros, then this is the sum for which tax threshold should be determined. 10 or 15 percent savings tax, which concerns higher amounts, is a lesser evil than a highly probable loss of everything. Finally, if an inadequate global financial supervision and turning a blind eye on tax havens (such as e.g. Cyprus) were one of the factors which led to the outbreak of the crisis, taxation of depositaries of local banks is a rational attempt to draw up a bill for troubles to the ones who substantially contributed to them.

The extortion payment will of course affect the Russian mafia or North European scammers who have tried to avoid paying taxes when conducting economic activities, but still it seems to be a more just solution than increasing the amount of empty money, the costs of which (in the form of higher inflation) would be borne by all inhabitants of the continent, also the ones who have been paying taxes diligently for years.

Unfortunately, what seems to be economically rational and moral does not necessary have to be safe. The main fear connected with taking away money from depositaries, which is now being discussed in the Cypriot government, is that it could give rise to mass withdrawing of money and – as a consequence – bankruptcy, which it was to prevent. That is why the banks on the island will be closed at least till Friday – although what was to happen has just happened, because even if a tax is not eventually imposed, the loss of trust in Cypriot financial services is a fact. It is not only about Cypriot banks – a storm connected with banks can take place also in other member states in the South. Financial markets have started to take it into consideration. The interest span between German and Spanish bonds increased on Monday morning by 24 basis points and reached 3.71 percentage points; in the case of Italy it was 3.35 percentage points. For extremely indebted budgets it means other expenses and a risk of going down the inclined plane, like Greece did it: the bigger the expenditures, the bigger the risk that Lisbon, Madrid and Rome will also ask for international help. Who will guarantee that taking away money from citizens will not be a part of an aid package? What is more, in Cyprus it is all mainly about showing German tax payers that the government does not spend their money freely and easily, while in the case of much bigger Italian and Spanish economies, external funds may be not enough. If tomorrow we can expect a tax similar to the one introduced in Cyprus, maybe it is worth going to a bank and withdrawing our savings?

It is difficult not to panic. Paradoxically, the lack of trust is becoming the main factor which stabilises the situation: since what to do with money withdrawn from a bank if crime is growing and it is difficult to find safe investments?

That is why an optimistic scenario is also possible. The example of Cyprus can make Europeans from the South aware that in the end it will be them who will have to pay for actions and negligence of governments which they vote for. Money does not fall from the sky, and in the end all public expenses are financed by private entities: in the form of explicit tax or discreet inflation. The attitude towards this fundamental economic rule is the main factor which differentiates Europe. The North is trying to show these conclusions to the South (although the methods are not necessarily subtle). If everything goes well, the European Union as a whole will be able to switch over to a more stable management model.