Thursday, March 21, 2013

On the crisis in Cyprus

I changed this morning's quote of the day to Sir Humphrey Appleby's "politician's syllogism" because I thought it particularly relevant to the vote in Cyprus earlier this week.

Various newspapers and commentators have been treating the vote by the Cypriot parliament to reject the initially proposed bailout package, which included a confiscatory levy on bank deposits above a certain size, as a sign of impending disaster and an unwillingness to take the measures necessary to pull the country round.

The thing is, Cyprus DOES need to take very tough painful measures, but THIS particular package was wrong, wrong, wrong.

The mere fact that the idea of a levy on bank deposits was seriously considered is going to have seriously harmful short and medium term impacts on the willingness of savers to put or leave their money in the banks, not just in Cyprus but probably in the rest of the Mediterranean area too. This in turn will have negative consequences on the ability of the banks to finance investment and loans which those countries need. If the levy had actually been approved those consequences would have been even more harmful and very long-lasting.

The Cypriot parliament has no good options, only bad and worse ones all involving different degrees of pain, and they will need to approve spending cuts or new taxes or a mix of both if they want the banks to reopen. But the package they rejected would have made matters much worse in the long run.

And I make no apology for pointing out again that if economic illiterates like Ed Miliband, Ed Balls and all the other Labour politicians who are calling on the British government to borrow more had their way, it would put Britain closer to where Cyprus is now.

1 comment:

Jim said...

There is the real problem. The "colleagues" really have shot themselves in the foot. To seriously request and expect such a raid on bank accounts is very dangerous indeed. You could argue that Cyprus is a very small economy (and you would be right about €17bn) That is not really the issue. The problem comes as, unlike Vagas, "what happens in Cyprus, does not stay in Cyprus" so its when the Spanish and Italian banks are being hit with bank runs, there is the problem.