The Power of ‘Oxi’

Yesterday a decisive 61.3% of Greek voters chose to reject the draconian terms offered to their government after fraught negotiations over bailout funds. They had been asked by Eurozone leaders to meekly accept further raids on their pensions, the only income keeping many households going after the destruction of the welfare system. They had been asked to to accept further erosion of protections for those lucky enough to stay in a job. They were told that failure to do so would lead to their expulsion from the Eurozone and the stability that the currency union is supposed to offer.

In another country, any other European country, there would have been a ‘Yes’ vote. (I expected Greece to vote yes.) Or more likely, the people would have never been offered a referendum at all. The Syriza-led government should not be criticised for consulting its people about its economic future. Greece has tried technocratic government and for obvious reasons decided that accountability was too important to suspend in times of financial difficulty.

Some in positions of power were no doubt hoping the past week would scare the Greeks of a ‘No’ vote. The country became insolvent. Capital controls were imposed, with withdrawal limits of just €60 a day from bank accounts. At the moment in Greece, you cannot buy music on iTunes because purchases count as money leaving the country. The message from ‘Yes’ supporters was clear: this is just the beginning. That message would have cut through anywhere else, but not in Greece.

As alarming as the past week has been, and the threat of effective expulsion from the Eurozone is, five years of the emaciation of Greek society has created more than enough people with nothing left to lose, particularly the young. They couldn’t be blackmailed. Voting ‘No’ offered them hopes of a better deal or at the least the prospect of economic recovery after conversion to a devalued New Drachma- a long shot at a brighter future, but at least some chance. And of course a chance to damage those who have inflicted austerity on them. Voting ‘Yes’ offered them more pain and an assurance that the Eurogroup would maybe think about relieving the country of some of its crushing €300 billion debt burden. But probably by too little and conditional on even more cuts. Who can blame them for voting no?

The resignation of the controversial Greek finance minister should be seen as a chance to reopen talks between Greece and its creditors. I hope the latter, especially the German government, will act reasonably. They know that Greece’s banks need a cash injection urgently, and they might try to demand capitulation on pain of allowing Greece’s financial system to crash. But the government now has a watertight mandate, and such a strategy will backfire as its people will not bear any cost to remain in the Eurozone. Such a Grexit would cause another financial wobble throughout the European economy and might well bring down the German government.

The best course of action is to negotiate a new bailout deal for Greece that works with the country to grow its economy and brings its debt down to a manageable level. The Greek people need to see that there is hope and a future for them within the Eurozone.

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Cyprus Calling

Map of Cyprus with EU flag

(Photo credit: Wikipedia)

On Saturday the 16th of March, the European Union and the government of Cyprus (that is, the internationally recognised state which covers the southern half of the island) quietly agreed the terms for a €10,000,000,000 bail-out for the debt-laden island. Quietly, that is, for the rest of the world. The people of Cyprus are outraged at the most draconian austerity plans ever seen in peacetime history. For it is not only the traditional pattern of regressive tax rises, public sector layoffs, and undemocratic privatisation that the islanders will be forced to accept,  but an unprecendented direct levy on all savings held in Cypriot banks.

Within hours, EU officials (notably, not the Cypriot government itself) announced that the first  €100,000 of deposits held by individual has been taxed at 6.75%, rising to 9.9% on savings above that level. Though this has raised  €6,000,000,000 for the Cypriot government, the indirect costs this precedent  will have dwarf any ‘benefit’. Within minutes, queues were forming at bank counters and ATMs, despite the futility of withdrawing cash from accounts in attempting to avoid the tax- as with all emergency moves like these, all means of avoiding it are blocked. In this case, banks were told to pay out no more than the 90.1% net balance of people’s accounts. Nevertheless, the queues continued to grow.

Cyprus has just raised the equivalent of one-quarter of its GDP, and this will be valuable in meeting its liabilities to foreign investors. Unfortunately this means that any country in the EU which is having financial problems is likely to face a run on its banks, caused initially by fears of a tax but then becoming self-sustaining, even if there was a chance of avoiding emergency assistance. The world has just witnessed a tragic and short-sighted undermining of confidence in the safety of retail savings.

Some on the radical left have commented that, though taxing pensioners on their modest care home fund is appalling, the principle of a one-time levy on the assets of the super-rich should be welcomed. To quote Peter Mannion (the cynical Cabinet minister from the popular satire The Thick of It), it is a “political merengue: sweet, but without much real world substance”. Trust that money in the bank is as safe as cash in the hand is crucial to supporting the bread and butter finance which keeps the global economy functioning.

The implications of this levy will not appear to be a significant problem today, but it is only a matter of time until they come back to haunt Europe. And this has only happened for the sake of a fraction of a percentage of the region’s annual economic output. Unfortunately, it is too late for us to negotiate a fairer deal for Cyprus. The logic of the austerity measures has become so complex as to become self-contradictory: in order to avoid a default on Cypriot government bonds, which would damage investor confidence, an effectual “default” on Cypriot savings has taken place… which will ultimately damage general investor confidence.

Simply allowing Cyprus to default on, say, 50% of its debts followed by an EU-funded loan to any pension funds or banks affected would have been a more productive path for European officials to follow.  This is particularly true when one considers how small the Cypriot national debt is compared to the European economy- Spain or Italy might be another story.  The effects of those who have agreed to take a risk on their capital (by lending to a government) actually enduring a loss on some of that capital  would be less severe than rendering savings banks unsafe investments. How can it be that investors have come to expect fair returns on gilts, and yet expect the losses to be paid by the general population who have recieved no such benefit?