Dialogue with the Alter Ego about the Cyprus rescue package, first drafted on March 18, 2013
Question by Alter Ego of Noah denkt™ (AE): Germany’s international image has received yet another severe blow in connection with Cyprus rescue package that had been imposed by EURO finance ministers and that, by now, has been rejected by the Cypriot parliament. In particular, it is has been Germany’s insistence to levy an extra tax on Cypriot savings accounts that has being heavily criticized internationally. The argument has been and is that levying such a tax will set a negative precedent elsewhere in Southern Europe which in turn will adversely affect the recovery prospects there. Does Noah denkt™ agree with this analysis?
Answer by Noah denkt™ (Nd): There is no doubt that Germany has been singled out, yet again, by the international opinion as being the bad boy. And it really doesn’t help in this respect to remind the audience of the fact that the IMF had equally backed the bail-out conditions that were originally being negotiated by the EU. The simple fact remains that by tradition Germany can’t seem to get it right in the eyes of the international opinion. But be this, as it may be, the Cyprus rescue package warrants a profound reflection. And after thinking this through quite a bit, we have come to the conclusion that in case you want to keep Cyprus inside the EURO, which we ourselves do not necessarily agree with you will be hard pressed to find a better solution than the one that has been decided upon by the EURO authorities.
AE: And why is that?
Nd: Because the original demand of Cyprus to facilitate a 17 billion EURO bail-out would have been equal to 100% of the Cypriot GDP which in turn would have set a bad precedent for hopefully unnecessary future bail-out negotiations with other countries. After all, it has to be remembered here that the Greek bail-out only reached a volume of roundabout 50% of local GDP, the Portuguese and Irish package reached 33% of their respective GDPs and the Spanish bank rescue plan accounted for only 5% of local GDP. In other words, mere justice demanded that the Cypriot bail-out package would have to include a considerable element of local Cypriot funds. And where else could you find such money in Cyprus if not with the local saving account holders?
AE: And the remaining 7 billion Euro that the original EURO bail-out plan fell short off were really worth breaking a fundamental rule of capitalism which is to encourage savings in order to build up a capital base that can generate pro-growth investments?
Nd: Well, again, we would have preferred an exit of Cyprus out of the EURO currency union. But all those who like to criticize Germany’s position in the EURO rescue effort tend to not view a Cypriot EURO exit as desirable. So what more can we say?
AE: In other words, Noah denkt™ isn’t happy with the saving account levy either?
Nd: We don’t like it but we could live with it.
AE: And you do not buy the argument that such a tax would erode the trust of savings account holders elsewhere and therefore lead to a loss of capital being available for the recovery in subject countries?
Nd: Well, as far as we know the EU has made it clear that the Cyprus levy is a one-off only. In other words, people in Spain, Portugal and Italy shouldn’t be too concerned about this since it is quite unlikely that the same will happen to them.
AE: But how credible is this one-off affirmation of the European Union? Is it not more reasonable to assume that the EU will be just as prepared to break their one-off promise as it has done so in earlier occasion (Maastricht treaty) when circumstances seemed to dictate that?
Nd: Well, we believe that this proclamation of Cyprus being an exception is pretty credible. After all, it can’t be denied that the bank situation in Cyprus is quite different from that of Greece and others. Just think about all the allegations surrounding Cyprus of being a money-laundering fiscal paradise. Such allegations aren’t being raised against banks in Spain. So, it seems to us as if we should take it easy here with our criticism of the EU.
AE: Is it not true that you are overly lenient here with Germany and the so-called EURO-group?
Nd: We don’t think so. Much rather do we believe that there are bigger issues to worry about, than a relatively limited contagion scare that might or might no emanate from the Cyprus rescue package. Don’t forget that the issue of Europe’s future welfare state concept hasn’t been adequately discussed yet.
AE: Still, the markets in Italy and Spain were quite worried about the Cyprus package. So it should behoove you as well to address these worries adequately.
Nd: Well, in our opinion the markets didn’t jolt quite as much as one might have though they would. So, we feel that our nonchalance has been vindicated here.
AE: Let’s wait and see. After all, this Cyprus issue is still on the front-burner.
Nd: You are right, let’s continue to watch this.