Cyprus is a small country of some 839 thousand people. It joined the Eurozone on January 1, 2008. That decision sealed its fate. Now the Troika are making it pay for that mistake, one that the Troika lured it into making. Such is the way of the Eurozone. The elites set the system up to suit their ideological preferences. Lure the local national elites who aspire to wine and dine in style in Brussels into becoming pro-Euro. Then attack the ordinary folks when the system collapses. But as we know, the Eurozone was a system designed to fail as soon as the first major negative aggregate demand shock hit. The shock hit in 2008. The system failed. Since then the elites have been divining ways to push the costs of those mistakes onto those who are least able to pay. How many Euro decision-makers are unemployed as a result of the crisis? How many Euro decision-makers who have since retired have lost any pension entitlements? But now the citizens of Cyprus are having their savings plundered by the Troika. The shamelessness seems to have no bounds. It is not even a strategy that will deliver the outcomes they have defined. The elites go from one blunder to the next and meanwhile all the key economic targets continue to deteriorate (like employment growth etc). And even the irrelevant targets that are the obsession of the elites also move in the opposite direction to that intended. If it wasn’t so tragic it would be the comedy of the century.
When the Republic of Cyprus entered the Eurozone, 39 per cent of its land mass and the people within that 39 per cent didn’t. This area belongs to – Northern Cyprus – which is officially the Turkish Republic of Northern Cyprus that is recognised only by Turkey. The rest of us consider it an occupied territory of the Republic of Cyprus.
Occupied or not, the Turkish Cypriots have been spared the problems that the rest of the Island is being forced to endure as a consequence of the entry into the Eurozone. The TRNC has its – own central bank – but uses the the New Turkish Lira. The fact that the “nation” enjoys fiscal transfers from the Turkish government effectively makes it a state of Turkey in monetary terms.
On the other side of the “border” which is not recognised by the “Cyprus Problem”, Cyprus uses the Euro and bows to the ECB. When it entered the Eurozone its unemployment rate was 3.7 per cent ((Source). Since then it has risen to around 12 per cent and the – Ministry of Finance – predicted it will reach 14.2 per cent by 2014, given the austerity that is now being imposed on it.
And given the scale of the economic collapse, which is now impacting on the viability of its banking system, the Government of Cyprus is in trouble. Why? Because it surrendered its currency sovereignty. That is the long and short of it. All the talk of imbalances, structural inefficiencies etc are sideshows and smokescreens to divert our attention from the fact that it was going along nicely until 2008.
After which its economic fortunes collapsed.
And how does the EC and its partners in crime (IMF etc) plan to deal with the collapse in fortunes. Answer: make them worse. Except in this case they have devised an even more crazy plan. Crazy in the sense that it punishes activity that is virtuous (private saving), will demonstrate to the rest of Europe that it is dangerous to save in Euro, and is deflationary in the extreme at a time when there is a premium on growth.
The news was bleak. The ABC reported in the article yesterday (March 17, 2013) – Cyprus’ savers bear brunt of eurozone bailout.
This morning (March 18, 2013), the predictable stories started to emerge. For example, the Melbourne Age article – ATMs drained as bailout tax triggers run on bank deposits – reported that:
n a move that could set off new fears of contagion across the eurozone, anxious depositors drained cash from ATMs in Cyprus on Saturday, hours after European officials in Brussels required that part of a new €10 billion ($12.6 billion) bailout must be paid for directly from the bank accounts of savers.
Despite withdrawal limits imposed by the banks, “most of them had run out of cash by early evening. People around the country reacted with disbelief and anger”.
This picture from the Melbourne Age article linked above will repeat itself across Europe if the Troika continue to steal peoples’s savings in this way to pay for their own incompetence.
While the Government attempted to claim that it was a “one-time tax of 9.9 per cent is to be levied on Cypriot bank deposits of more than €100,000” which would hit “wealthy depositors – mostly Russians who have put vast sums into Cyprus’s banks in recent years”, the reality is that there is also to be a 6.75 per cent tax on all other deposits:
… meaning that Cyprus’s creditors will be confiscating money directly from pensioners, workers and regular depositors to pay off the bailout tab.
This is the first time that the the Troika has attempted to “tax” the savings of ordinary people.
As a “tax” the move will be deflationary. It might be claimed that its impact on aggregate demand will be minimal because it is a tax on saving. But people use saving balances to risk manage and as the risks are rising in Cyprus it is clear that they will attempt to “pay” for this impost by consuming less and restoring, in part, the saving balances lost by the Troika theft.
Today, the Cypriot parliament will be voting on the bailout deal. It is ironically a bank holiday in Cyprus. The ruling party has only 28 of the 56 seats in the parliament. The President is already blustering about the need to support the Troika death sentence.
The Sydney Morning Herald article (March 18, 2013) – President tries to calm ‘betrayed’ Cypriots – reported that in a televised address to the people, the Cypriot President, Nicos Anastasiades claimed that the bailout was the “least painful” option.
He claimed that if they refused the deal then the nation would suffer:
… a complete collapse with a possible exit from the euro.
The best thing that Cyprus could do would be to refuse the coercion from the Troika and exit the Euro. Other nations might then see that the sky doesn’t fall in and that most of the conservative claims to the contrary are just bluff.
I will write more on a Cyprus exit in due course.
But consider this action in the context of a document that came out recently from the European Commission – ECFIN Economic Brief (Issue 20) March 2013 – which reads like one of those statements that the – Peoples Temple Agricultural Project – might have released.
This document is sort of the ECs equivalent of “Flavor Aid”.
The brief carries the title – The debate on fiscal policy in Europe: beyond the austerity myth – claims that “large adjustments are needed in most economies to restore sustainable fiscal positions, not because of the arbitrary will of the markets or of EU institutions”.
The EU fiscal recommendations are not an ideological call for austerity at all costs. In general, the flexibility embodied in the rules is being used within a “steady structural” strategy.
Given the lynchpin is the Stability and Growth Pact and later the Fiscal Compact (the “Six-Pack”), which we know imposed fiscal rules that were plucked out of thin air over a weekend by the French advisor to the Mitterand government at the time.
Remember the revelations in Le Parisien article (September 28, 2012) – L’incroyable histoire de la naissance des 3% de déficit (The incredible story of the birth of the 3% deficit)
An English language report – The secret of 3% finally revealed – says that a “former senior Budget Ministry official” in the Mitterrand government was asked to come up with the fiscal rules that would become the Stability and Growth Pact (SGP).
He was quoted as being the “the inventor of the concept, endlessly repeated by all governments whether of the right or the left, that the public deficit should not exceed 3% of the national wealth”.
Note that this reporting, itself, is misleading because as we learned in the quiz this week, wealth is a stock and GDP is a flow and the SGP budget deficit rule is specified in terms of 3 per cent of GDP (the size of the flow of national output and income in any given period).
Anyway, the French official had this to say when asked about the origins of the 3 per cent rule:
We came up with the 3% figure in less than an hour. It was a back of an envelope calculation, without any theoretical reflection. Mitterrand needed an easy rule that he could deploy in his discussions with ministers who kept coming into his office to demand money … We needed something simple. 3%? It was a good number that had stood the test of time, somewhat reminiscent of the Trinity.
Which is another example of the arbitrary rules and assessments – all part of an elaborate smokescreen or charade – to limit the capacity of government. There are countless highly paid officials in Brussels strutting around making all sorts of statements about the need for nations to cut welfare, wages, jobs and the like based on a rule that was just made up on the spot without any economic justification or authority.
The ECFIN document basically addresses a number of what it terms to be “myths” about the austerity.
The first myth:
There was irrational panic in the sovereign bond markets of vulnerable European countries, and this led to the imposition of unnecessary harsh consolidation.
The ECFIN authors claim that the panic was rational and use the Greek haircut to demonstrate why bond market fears were justified. I found that an extraordinary argument. The haircut was not a market event but a cynical strategy by the Troika to punish investors who had outlaid money in good faith.
The fact is that the bond markets were themselves deluded by the apparent chimera of low risk in public Eurozone debt. But that is beside the point. The reason Greek debt became problematic lies in the essence of the flawed design of the monetary system, a design created and engineered by the EU and its “international partners”.
The ECFIN authors then claim that the OMT (and SMP) conducted by the ECB has calmed the bond markets down. Of-course these interventions have calmed things down. They amount to fiscal actions of the currency issuer, which in a fiat-currency system would ensure that public debt issued is risk free.
The ECFIN authors, however, say that the fact ECB has stabilised the bond markets:
… cannot be read as evidence that significant fiscal adjustment was unwarranted.
Au contraire. Yes it does. It demonstrates that if the Eurozone had been designed to include a properly functioning federal fiscal capacity, which could provide fiscal transfers to the “state governments” in the system who were beset with negative asymmetric aggregate demand shocks, then there would be no sustained crisis at all in the Eurozone. Greece would been allowed to run larger deficits, than say other “member states” in recognition of the disproportionately larger hit to aggregate demand that it incurred in 2008 and 2009, and growth would have been immediately supported.
All the talk of trade imbalances among the “states” would have been irrelevant. Further, vast discrepancies between the states in terms of wages and welfare rights would not have been tolerated. So there would be no singling out of Greece, Spain or Portugal etc. The Federal authority would use its currency-issuing capacity to ensure that all states were able to meet the spending gap that they faced.
The ECB is sort of playing that role but in a totally perverse way. They are prepared to bail the banks out and hold bond yields down low but then insist of killing growth to ensure they have to keep bailing out banks and buying public debt. It is irrational in the extreme and the only explanation is one that is based on ideology. There is no economic credibility to their overall strategy.
The ECFIN paper recognises that there are “higher multipliers in an environment of weak activity, lack of room for a supportive monetary policy, and tight financing constraints for private agents” – which means that the there is, in their words – “non-linearity in the growth cost of fiscal adjustment” – which in English means – fiscal austerity is highly damaging to growth and employment and impacts almost immediately in a negative way on both.
They also hint that any policy strategy should allow for a “sequencing of public and private deleveraging for getting out of a balance-sheet recession” – which means in English – when the private sector has over-borrowed and is now intent on saving there is no scope for public sector austerity.
In fact, public deficits are required to support the private deleveraging process via aggregate demand support. For the private sector to increase its saving overall, there must be economic growth and that has to be supported with public deficits.
So two real world reasons why austerity is bad.
Not to be daunted, the ECFIN paper say we have be “treading a fine line however”. What line is that exactly?
Well if government don’t tear the heart out of their economies now they might trigger “market expectations of a sovereign default and a liquidity crisis”. Ho hum. Didn’t they previously recognise that the ECB was a bulwark against that possibility? Yes, they did.
So how can the market rule when any central bank is stronger and can set yields at whatever level they like and play the bond markets out of the game? Answer: the markets can never be more powerful than a central bank in this situation.
What else defines this “fine line”?
Apparently, “basic arithmetic”. That is something I can understand. So their argument goes like this. Huge adjustments are required in deficit positions in the “medium-term”. So:
… spreading out consolidation over several years in broadly equal instalments will translate in not-insignificant fiscal effort from the beginning.
Plain arithmetic – allocating a whole over some sub periods.
But the issue is the question of the need for consolidation in the first place. That is apparently a consensus. Who between? The EU, the IMF, the OECD and the ECB. And, presumably, all the lackey economists who get paid huge amounts of consulting income from Brussels to do their bidding.
The ECFIN paper claims that the EU has been mindful of these issues and that:
… fiscal policies under the E(M)U framework have struck a balance between these conflicting considerations.
How so? Well they used fiscal stimulus in 2009/10 and then:
… it was agreed that the initial fiscal relaxation should be followed by fiscal retrenchment to stabilise and reduce debts
And so the austerity began. But this mindless mechanical approach – we do zis today and zat tomorrow – is seemingly context free. Haven’t these Eurocrat sycophants looked at the data that this agreed policy has created?
Haven’t they seen that unemployment continues to rise across the zone and each month a new record high is reached? Haven’t they worked out what 60 per cent youth unemployment (which is being approached in some countries) means for the future? Haven’t they realised that they have created a DEPRESSION in southern Europe?
The third allegation they consider is that the “Commission follows an inflexible approach”. Apparently, the EC is eminently flexible. Not only has it forced nations to obey by its inflexible fiscal rules but:
… a key aspect of the flexible approach we have adopted has recently been to make more explicit the focus on structural targets, rather than just the overall deficit of a country.
That is, not to be content with creating a depression they are now being more explicit about which conditions of work, pensions, etc are to be cut. How flexible of them!
And under the SGP the EC will not immediately enact the moronic “excessive deficit” rules, which include fines and sanctions. But we are told that:
Missing the nominal targets does not expose the country concerned to an escalation of the excessive deficit procedure, including the possibility of financial sanctions, if the structural effort (specified in the recommendation in terms of changes in the cyclically-adjusted balance net of one-off and temporary measures) has been delivered. Rather in these cases the country would receive an extension of the deadline for correcting its excessive deficit. The absolutely key point here is that we have not, and will not, pursue dogmatic targets for the reduction of the headline fiscal deficit, irrespective of the circumstances a country finds itself in.
The absolutely key point is that the EC enforces these pro-cyclical strategies in the first place which force nations to miss these arbitrary targets. Damaging growth and then saying to a nation that you won’t be fined if you damage growth a bit more is highly flexible. Wouldn’t you say?
The fourth allegation they address is that “Fiscal consolidation is not politically or socially sustainable”. They recognise that there are severe strains on social cohesion in some nations as a result of the policy framework being pursued.
But they claim they have “spread the costs across the population” – which is a lie. They are, in fact, concentrating the costs on the unemployed, pensioners and public employees. Businesses then become collateral damage.
They claim that they are making cuts “without weighing on aggregate demand in the short-run” but complete that sentence with “although not all consolidation can go this route in practice”. Which is an extraordinary thing to say. The data shouts out that they are liars. There has been massage short-term damage to aggregate demand – which is why unemployment rises each month.
The audacity of the Troika is extraordinary. They know that their policies are causing massive real damage. But they still nuance and massage their message with these sorts of statements. The oft-used “growth friendly austerity” is another way they try to convince us that underneath all the carnage is a very friendly growth-orientated policy.
The reality is that fiscal austerity kills growth – almost outright.
The final allegation they address is that “The Commission’s approach is one-sided. It puts all the burden of adjustment on debtor countries”. They respond by saying that:
For vulnerable countries of the euro area that face a large external sustainability gap, external growth is the only sustainable way to grow out of their debts.
This is straight from the IMF. Export-led growth will win the day. But if all nations are engaging in fiscal austerity including many of the Zone’s trading partners, how will that strategy work?
Please read my blog – Fiscal austerity – the newest fallacy of composition – for more discussion on this point.
The ECFIN authors, after 6 pages of self-praise conclude that perhaps there is a case for “the potential attraction of a “fiscal capacity” at the central level, in the form of a stabilisation instrument”.
But, of-course, this would be used to maintain “a credible rule-based framework” (that is, deny the basic reason why a federal capacity is needed in a federated monetary system).
And, equally, of-course, “such a tool should only be considered in the longer term in the context of full fiscal and economic union”. So several years of conferences and meetings in Brussels – with plenty of well-catered for lunches and lots of European wines for the EC elites who pontificate on these matters while they hire their bureaucrat economists to write self-aggrandising rubbish like this paper.
Lots of distractions today.
Cyprus should vote to exit the Eurozone immediately and reject the oppressive hand of the Troika. Send E-mail to the Opposition party in Cyprus immediately urging them to resist the neo-liberal bluff and to take their nation back into the world of currency sovereignty where individual savings are respected and governments have the latitude to pursue public purpose and counter major aggregate demand shocks.
That is enough for today!
(c) Copyright 2013 Bill Mitchell. All Rights Reserved.