Cyprus rejects a disastrous panic measure

Cyprus, like a number of other countries which followed for too long the fatally lax policies which the Labour party implemented in Britain and are still urging on us, is in a terrible financial mess and is going to have to take very painful decisions if a total financial meltdown is to be avoided.

But the fact that tough choices will have to be made does not mean that any tough choice is right.

And the proposal for a levy on savings which Cyprus MPs have wisely rejected was perfectly calculated to make a bad situation worse.

I explained in a recent post why negative nominal interest rates are a suicidally disastrous idea and I was horrified that a senior official of the Bank of England was prepared to so much as consider them, even if this only applied to money deposited by other banks with the central bank, which was the proposal suggested.

A tax on savings would be even more disastrous for much the same reasons.

Even considering this sort of policy can cause a run on banks and set people to hiding their money in a safe under the floorboards rather than investing money where it can help the economy. It fosters attitudes which were a serious handicap to economic progress even in the nineteenth century and would be far more damaging now.

It is important that a society provides an incentive for people to save a sensible amount and provides financial mechanisms for those savings to be channelled into productive investments. Allowing inflation to harm the real value of those savings is bad enough. Making people think that money they have put into banks of building societies is not safe is economic suicide.

Of course, Cyprus will still have to adopt painful and unpleasant policies to stay solvent. Hopefully they will be able to find measures which will not be as disastrous as confiscating savings would have been.

Oh and anyone who is considering, even for a millisecond, casting a vote for the Labour party any time in the next decade ought to think about this. Labour not only put Britain on the road to where Cyprus is now, they have not learned their lesson and are still advocating borrowing even more.

Despite the efforts the coalition has made to bring down the defecit, and they have reduced it, the British government is still borrowing far more than we can afford. The debt burden we are building up is still terrifying and will handicap the public finances for decades as the interest on government debts becomes one of the largest burdens on the taxpayer - it's already taking more of your taxes than the country spends on schools.

I hope and expect that George Osborne will show in today's budget that he understands this. Judging by their recent comments, the Labour front bench does not.


Jim said…
Its good such a plan has been rejected. Though due to the Euro they had to be open about what they intended to do. The same thing has happened here too, just they call it quantitive easing, Inflation and Devaluing the Sterling. Different names, and they don't remove pounds from accounts, they just reduce the spending power of each pound that's there, and print new pounds, so the effect is exactly the same.

This also sets a very dangerous president I would still not be surprised to see bank runs in Cyprus once the banks re-open, and because the EU has tried to do it now, then would not be surprised if the Spanish banks start to experience them too, for fear of the same policy being applied there.

The budget does have some very positive things about it, will give George that one (higher tax threshold, reduction in coperation tax and employer nat ins). Will comment further as I am sure you will post about it, I would have liked to have seen borrowing cut further and spending reduced a lot more thugh

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