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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Is Cutting the 40p Tax Band a Real Priority?

It is almost politically impossible to explicitly increase a tax rate, or to impose any new tax on individuals. But politicians struggle to square this with public demands for enhanced public services or, more recently, opposition to austerity measures. Consequently, ‘stealth taxes’- tax levies or other revenue raising measures designed to evade public notice- have become a widespread phenomenon, but Britain specialises in them. The Thatcher government more than doubled VAT, masking a tax hike in people’s shopping bills, whilst presenting itself as a ‘low tax’ administration. Later, Gordon Brown used various stealth taxes to finance much needed public investment. Today, left-wing opponents label the Coalition’s bedroom tax and tuition fees increase as stealth taxes (they were designed to cut spending, but both have actually cost the government money).

Meanwhile, right-wing critics accuse the Coalition of stealthily raising the tax contribution of the ‘middle class’ by raising the thresholds at which the 40p Income Tax band, Inheritance Tax and Stamp Duty are paid, at sub-inflation rates. That the former two affect about the richest 15% and 5% of the population respectively does not stop talk of ‘hitting the squeezed middle’. Nevertheless, as the thresholds fall in cash terms, more and more people pay the respective taxes, and they pay more of them. This ‘tax creep’ can raise billions of pounds, and can do so quite progressively, in stark contrast to the the rest of the Coalition’s regressive austerity agenda. In certain cases, tax creep could be a Good Thing.

The problem is, it offends the upper middle class, the Tories’ electoral bedrock. That’s why they have revived talk of cuts to the 40p Income Tax band and Inheritance Tax after the next general election. Cynics would suggest that the Conservatives said the same thing before the last election, but failed to honour such expensive policies. However, I think the Tories intend to follow through this time, aware that it costs less, politically and financially, to give tax breaks to the modestly affluent than the ‘filthy rich’, who have already benefited hugely from Tory government.

Given there will be a budget deficit of £70 billion in 2015 that will need filling, at least partly, through tax increases, there could be a fairer and more transparent means of doing so. For example, a 30p Income Tax band could be introduced at the current 40p band threshold (around £42,000) and frozen in cash terms. Over a period of several years, the 40p threshold would rise with inflation, over time creating a significant 30p band between the thresholds. This would have the benefit of increasing tax revenues whilst softening the impact on high(ish) earners. It would also mitigate the rather sharp rise from 20p to 40p Income Tax that can come as a shock to those promoted into the upper band.

Solutions are yet more complicated with regards to Inheritance Tax and Stamp Duty, particularly given their connection to the issue of housing. With British house prices rapidly soaring into the stratosphere (for example, London prices rose by 18.5% last year) policymakers are beginning to consider inheritances to be the difference between property ownership and rental ‘slavery’- being tied to an overpriced and insecure rentals market. As such, the 40% paid on inheritances above £325,000 has become deeply unpopular- though only with people with any hope of buying a house. The ‘have nots’ who expect modest inheritances generally don’t care.

Then there is Stamp Duty, peculiar in that it is not banded like other taxes. For example, someone buying a house for £249,999 pays 1% of the entire sum, £2,499.99 in Stamp Duty, but 3%, £7,500, on a £250,000 house. Before the post-2000 house price boom, the majority of homeowners would never have paid a penny in Stamp Duty, but most houses have ascended in value whilst Stamp Duty (SD) thresholds remain static. The Daily Telegraph complains that Stamp Duty dampens the housing market- as if a) house prices were not already increasing at an unhealthy rate and b) a few thousand pounds in tax is really noticed when the value of a given house rises by that much in the space of a month. However, it is fair to say SD is applied unfairly: it was designed to apply only to the most expensive houses, not all of them. Also, its ‘slab’ banding distorts house prices.

A new tax regime is needed to raise the several billion made by Stamp Duty, but in a more equitable fashion, ideally in a way which does not exacerbate the present housing crisis. The stealth tax of static SD bands should give way to a transparent tax system. I would like to float the idea that SD is abolished on homes worth less than £1 million. Instead, a reasonable rate of Capital Gains Tax (CGT) should be levied even on taxpayers’ main homes. This move, which would be politically untenable if not accompanied by a sweetener like the removal of SD, would mark a symbolic transition from taxing people’s need to house themselves to taxing unearned wealth. It would also shift the tax burden from cash-strapped first-time buyers to those in larger properties. And crucially, CGT would actively discourage housing speculation, a problem which is damaging our economy by restricting the mobility and spending power of workers.

There might be fairer and more honest ways of raising money for public services than ‘tax creep’. However, the aim of them must be an equitable and people-friendly distribution of social costs, not the placation of the Daily Telegraph.

Switzerland Closes Its Borders

Switzerland’s famous tradition of direct democracy has often made life difficult for its government. Unlike in much of the rest of Europe, in which governments call referenda when they want a “right” answer, the federal Swiss government is bound by the result of ballots called for by the general public. Personally, I think that there are many advantages to a Swiss-style hybrid of representative and direct democracy. It prevents politicians going mad with power, for a start. So to be clear, I’m not questioning the system.

However, the results of a ballot on capping the number of EU and EEA migrants moving into the country are very troubling. By a majority of 0.3%, the Swiss people have voted to impose a cap- albeit at an unspecified level- which breaches European-Swiss agreements on free movement of workers and goods. The only option open to Europe is to raise the trade and immigration barriers that it applies to non-member states. This would damage the Swiss economy, which sells half of its exports to the bloc, and also relies on the open border for labour- some 1% of the country’s population is added every year by foreign workers. The price a country pays for punching well above its weight in trade and finance (not to mention being a tax haven), is to have a large proportion of foreigners in its population, in this case 25%.

So I’m not at all surprised that the Swiss public are worried about being “swamped” with foreigners. If the UK had a population that was one-quarter foreign born rather than one-tenth, I fear the country would descend into racial violence. But Switzerland has always been an open country, one that inspires people, and one that is much stronger than its population and economy suggests. Remember that Switzerland was an island of neutrality even at the height of Nazi Germany, which didn’t generally tolerate neutrality.

I’m sure Switzerland can fall back on its tax haven status and financial clout to survive and grow outside of the EEA, but by sealing itself off it is undermining its role in Europe and the world.

FLASHBACK: The Green Movement’s New Friends… The City?

Originally published in November 2012

An alliance of over 200 financial institutions, including the insurance and pensions giant Aviva and the astoundingly unethical conglomerate HSBC, controlling a combined £13 trillion of assets, has called on governments around the world to take more action to prevent climate change. The firms warn that natural disasters such as Hurricane Sandy (which they point out caused $50 billion worth of damage) are only going to become more regular with advancing climate change, and say that this represents a major threat to the global economy.

And this means that “the banks are right”. Excuse me for a minute while I marvel at the oxymoronic nature of that sentence. However, I am sceptical as to how far-sighted these financial institutions really are: as a general rule, commercial money only sees 10 or at most 20 years into the future. I don’t see investment bankers flocking out of their ivory towers in the Square Mile to join Greenpeace in donning sandals and attending demonstrations whilst munching tofu.

But seriously, there are two points to be made here. Firstly, these corporations are demanding state action to slash carbon emissions, and whilst it’s all very well adopting such rhetoric, I’d question the extent to which the financial sector is willing to pull its finger out and contribute towards the cost of these green measures. If a government increased corporation tax (or the top income tax band) to help fund any of this, they’d be the first to threaten relocation to Switzerland or Dubai.

That said, it is well known that the FTSE 100 collectively own the political leadership of most Western governments, so this unholy alliance of big business and lefty environmentalists (and I am proud to be a member of the latter group) could be just the right combination to force the world to act. With so much to do in the space of 40 years, we need all the support we can get.

My second point is that it is interesting to note that the organisations at the centre of the “free” market machine, which lobby for savage tax cuts and, by extension, a much smaller state, seem to view governments, not the markets, as the organisations responsible for preventing environmental disaster. They’re against state intervention unless the state is subsiding a lucrative new green sector of the economy. Ahem (“cherypicking”)!

I suggest we call their bluff and introduce legislation forcing investment firms to sell holdings in oil, gas, air travel and mining companies, in favour of direct loans to renewable energy and other green projects.

Sounds fair, doesn’t it?

A Devisive And Regressive Subsidy

 

I am one of the harshest critics of the UK’s Coalition Government. To claim otherwise would require monumental self-deception. However, I do place a good deal of emphasis on viewing my political opponents fairly, and accepting that most people have positive intentions- however misguided I consider them to be.  And as such, I seriously believe that Coalition ministers think their Childcare Tax Credit scheme will help parents. However, I doubt that its introduction a month before the approaching General Election is a coincidence, and the way in which it favours high earners is a coincidence.

Under the scheme, the Government will allow parents to buy childcare vouchers up to the value of £4,800 per child (aged under 12) per year. The government will then top up the balance by 25%, provided both parents are in work and earn no more than £150,000 each. Unsurprisingly, this has provoked wrath from families with stay at home parents, full time carers, and those who are puzzled that the Government have taken cash Child Benefit from households on £50,000 a year only to subsidise childcare for those on up to £300,000 a year. Also, there are justified claims that 20% subsidy for childcare is far too little assistance for those who can only access Minimum Wage jobs, for example.

In Britain we have done a lot to encourage mothers in particular to return to work at ever shorter intervals after they have given birth. It is only right that women should have a free choice as to whether to resume their careers promptly after having a child or to care full time for their young children. However, we are now failing to provide that choice. Instead, through the withdrawal of financial and societal support for stay at home parents of either gender we are now forcing toddlers into full-time childcare regardless of their parents’ wishes. In my view, the state should support parents in either course they should take, and do away with the insulting perception of stay at home mothers as unintelligent and stay at home fathers as ‘unmanly’ as the unenlightened prevailing stereotypes suggest. It is not the role of the government to dictate how parents bring up their children, and yet sadly the Childcare Tax Credit is another step towards this. The obvious question to ask here is: why does a stay at home parent need childcare? That is because it is encouraged for both the wellbeing of parents and children that some part time attendance of nursery takes place before entry to school.

Then there is the unfortunate fact that the Coalition is robbing Peter on £50,000 a year to pay Paul and his wife on a combined £300,000 year. Childcare can take a large bite out of the income of even a middle class household, and such blatant redistribution of money from these people to well-paid City executives is simply unjust and should be challenged. Would it not be simpler and fairer to subsidise childcare- and properly, at more than 20%- at source? I advocate the Norwegian system in which parents are charged a flat rate of about £2 an hour on a pay-as-you-go basis, and offered further means tested subsidy where it is most needed. Local authorities would take over nurseries and after school clubs directly, and remove the often large profit margins which have helped inflate fees so much over recent years. Such a scheme would cost several billions of pounds a year, but the economic benefits of increasing the disposable income of hard up families are vast and would do much to boost economic growth. Is this not a better alternative to a token subsidy that discriminates against large groups of people in this country?

 

On The Co-operative Group

I try not to talk about business news on this blog too often. Though I follow the affairs of the corporate world with interest, my opinion of them seldom varies: the majority of large businesses in Britain and the United States take more from us than they give. Senior executives are paid too much and ordinary workers too little. Private equity firms are the scum of the earth. But we’re all familiar with the flaws of modern businesses. We also know of some of the recent positive developments, such as the ‘ shareholder spring’. Sadly it is bad news that I am examining today.

The Co-operative Bank is in trouble. A wholly-owned subsidiary of the Co-operative Group (the largest co-op in Britain, with 6 million members and divisions for supermarkets, pharmacies, travel agents, funeral directors, car sales, insurance, legal services, clothing, technology shops and banking), the institution has run into trouble after rescuing the ailing Britannia Building Society in 2009. Britannia was one of the larger building societies which didn’t demutualise like so many in the 80’s, 90’s and 00’s, but expanded into risky markets such as lending to large businesses. Only now has the full scale of the ‘toxicity’ of remaining assets become clear: Britain’s sixth biggest bank needs to fill a £1.5 billion hole in its balance sheet.

This is not such a large deficit that savers are at any risk. It is only creditors, not depositors, who may lose some of their capital. The Co-operative Group has worked with state regulators to devise a ‘bail-in’ that will put the bank back on its feet without taxpayer funding or support from the wider Group. But at what cost will this be achieved? The conversion of bondholders’ capital into shares which can be traded on the London Stock Exchange. They’re demutualising the Co-operative Bank.

Now, this might not be so bad. The Co-operative Group will remain the majority shareholder, allowing it to retain the emphasis on ethical finance and customer service that is the hallmark of the Co-op. But is that realistic? With shareholders to consider, the bank will pursue profit. Simple as that. Out with the unprofitable stuff like ‘making the world a fairer place’ or the provision of free fairtrade coffee to customers. And what happens when the Co-operative Group wants to grow? There’d be tremendous pressure to chip away at its shareholding in the hived off bank.

The co-operative movement is an important one- and it is intertwined with the labour movement. I’ll explain with an example. The Co-op originated as the Co-operative Wholesale Society in 19th century Manchester. A small group of people realised that in the newly industrialised economy, the working people could only improve their lives of intense hardship if they came together and pooled their purchasing power to negotiate lower cost, higher quality products and services from the capitalist class, and eventually supersede them. A society was needed in which the poor would support each other from the cradle to the grave. And so the CWS, built on the same principle as the welfare state a century later, was born. Affordable, filing food would be bought and sold to working men to sustain them in their hard labour. Families need not be crippled by funeral costs if a non-profit funeral insurance service was provided. And then, when families could scrape together some savings, they’d deposit it at a bank that accepted low-income customers.

The demutualised Co-operative Bank would have no right to retain the name that is associated with such a clear set of ideas. No capitalist institutions do.

Furthermore, the only way the proletariat, working classes, 99% or whatever you want to call them, is able to hold its own against commercial interests is to organise into groups that match the scale and influence of them. In the workplace, that meant trade unions. At the ballot box, it meant the Labour Party or its predecessors. And in the High Street, it meant cooperatives. And though the world has moved on, we face a return to the need for similar solutions today. In the 21st century, the internationalisation of the struggle for justice is what’s needed. International competition on labour costs, tax rates and regulation will erode our living standards unless people and organisations work across national boundaries.

On a less philosophical level, the Co-operative Bank provides a valuable alternative to its exploitative and corrupt rivals which dominate the banking maket. Without the Co-operative, there remains only a small number of building societies and credit unions within the mutual sector. As I have said before, mutuals should and will be a huge part of the global economy of the future. The power of the guardianship of such vast sums of money as a bank does has been used to great effect by the Co-op. Without somebody striving to do what’s right, a better future slides that bit further out of reach.

That’s why I’m appealing to both members and customers of the Co-operative Group to contact them and demand that they look at alternative options to selling one of their- our- two symbolic divisions. Could the sale of our travel agency plug the gap? What about merging the bank with another building society? And if no alternative presents itself, then at the very least we should ensure that a sold entity does not use the co-operative name. That name is above that of commercial interests.

The Great Student Loans Rip-off

When Student Loans were rolled out in Britain, initially to replace Maintenance Grants and later to cover university fees, Conservative, New Labour and Liberal Democrat ministers all promised that, though the state reserved the right to retrospectively alter the terms of their loans, they would never do so. This week, the Coalition Government was forced to reveal secret plans it is developing to raise interest rates on loans issued in 1998-2012, in order to sell £45 billion of loans on the global financial markets. This will create a new market in derivatives and credit default swaps- products closely associated with the 2007 crash.

Currently, graduates pay interest at the lower of two rates: the Bank of England base rate (currently 0.5%) or the Retail Prices Index inflation measure, both plus one per cent. This practise deters potential investors, who are worried that a future loose monetary policy would see high inflation whittle away returns. After all, a lot can happen in the 30 year period that Student Loans repaid over.

The plans, which are oxymoronically termed ‘Project Hero’, would see ministers pursuing the argument that, as younger graduates are paying RPI+3% on tuition fees of £9,000 (an interest rate which is very anti-competitive), it is only ‘fair’ that older graduates pay more in the age of austerity. While such a sacrifice by graduates means no change in the rate of repayment, which is 9% of any income a debtor earns above £15,000 a year, it does mean that they’ll pay for longer.

The legality of the proposals is in doubt. Whatever the conditions the Government claims to have imposed on Student Loans are, there remains other legislation which may render any alteration of terms invalid. A court case is inevitable, in any case. And regardless of the legality, what of the morality of it? Morality appears to be a novel concept to the Government, but an effort should be made by them to observe it. Is it right to cheat large numbers of people of a considerable percentage of their incomes so as to satisfy highly profitable multi-billion pound businesses that they can make a quick buck?

There is only one way to describe Project Hero: theft, plain and simple. Whilst many would agree that it’s not fair that those who attended university in the past 15 years will pay less for their degrees than the current generation, the principle also applies to those who didn’t pay anything at all. And yet there are no calls for graduates born before 1974 (and thus would have reached university age when grants, not loans, were made) to pay any extra. None of the ministers involved in the plan paid a penny for their higher education. Some have suggested that if the Coalition was genuinely concerned about fairness, they’d either impose a retrospective tax on all graduates, or follow the most justifiable course and not impose a rise in tuition fees.

In light of such strong arguments, it is probably unlikely that the Government’s planned justifications for its policy will carry much weight with the public. The question that observers are asking is if it will proceed with this policy, or choose alternative means of reducing net expenditure on the universities? Already, businesses are being encouraged to apply for degree-awarding powers in an effort to increase ‘competition’ in the higher education sector. The first of these is Pearson, (which owns Edexcel, Penguin Books and the Financial Times) which has established a College offering degrees in Business and Enterprise. The key benefit of the concept from the Treasury’s perspective is that the fee loans are just £6,500 per year. As most students will never clear their loan by the end of their 30 year term, this means that the amount that the Treasury writes off on smaller loans is greatly reduced compared to those of £9,000 a year. Furthermore, the Treasury must pay fees to universities upfront on behalf of the student- so the lower the fee, the less money must be found this year.

Business universities may or may not be a good idea. But giving current students the choice to study at them is a fairer way of saving state funds than chasing graduates for more money than was originally agreed.

Another Disappointment From The Banks

In the UK, the problems associated with the oligopoly of the ‘Big Five’ firms which dominate the UK banking system are well documented. Admittedly, they are never acted on, but this is because they have so much influence- after all, it is these multinational giants which effectively control the distribution of financial resources that theoretically put inactive savings to use fueling growth and development in business. As such, they have the power to seriously undermine the government’s position.

That is why EU pushovers regulators argued that a series of takeovers, mergers and bailouts had resulted in excessive consolidation, and demanded that RBS and Lloyds Banking Group both hive off about 20% of their retail banking arms and sell them off. That was one of the most inadequate findings in regulatory history, but new competition is welcome in any case. Unfortunately, the two banks that planned to buy these newly created pulled out: Santander, already one of the Big Five (what was that about competition?) last year, and the Co-operative Bank this morning. In both cases, there was no serious threat to the status quo of inadequate lending to small businesses; obscene pay for executives; a dried up mortgage market; and a poor deal for savers. Even if any challenger could find the billions needed to buy an artificially-created banking unit, they’d still lack the resources to change the market. For a rough illustration, the two banks which Lloyds and RBS will now float on the stock market will have 300 and 650 branches, compared to 1500 and 2500 branches of the original banks.

Apart from anything else, there are significant implications for our democracy if our elected government (or not-quite-elected, in this case) can be held to ransom by a handful of businesses. It is widely agreed that it would be in the common interest to genuinely break up the banks so that the reprehensible blackmail of the state by ‘too big to fail’ corporations is a thing of the past, that a proper regulatory framework can be put in place without pervasive lobbying, and that institutions which don’t lend and don’t respect customers will fall by the wayside as they deserve to.

To do this, a cap on market share of the retail savings and lending sectors of 10% should be imposed, with the exception of the state-owned standard setting People’s Bank that I’ve previously advocated. If possible, the Government should facilitate mutualisation of one or two of the separated units, in order to ensure all three sectors can compete in ‘free’ competition.

Oh, and while on the topic, can I suggest that we have rules against the Treasury receiving free ‘guidance’ on banking regulation from staff on banks’ payrolls? There’s a tiny risk of a conflict of interest there.

Cyprus Cannot Declare Victory Yet

I prefer to cover a broad range of news topics on this website from week to week, so it is with a mildly apologetic tone that I return to the fast-changing crisis situation in Cyprus, and anticipate multiple articles on the Budget. It is also evident that I bored readers with my dwelling on Britain’s nuclear deterrent. I therefore apologise and pledge not to reopen the issue for… a little while.

The Parliament of Cyprus has voted decisively against the emergency levy on all bank deposits, which was a precondition of the loan from the EU. Now that the island’s financial system has been weakened by futile withdrawals by savers wishing to avoid the levy, the nation’s finances are in even more urgent need of repair. The EU have developed a reputation for being very inflexible lenders, and so Cyprus appears to be in a near-impossible situation.

If Cyprus defaults on its debts, even if only in the form of a “haircut”, observers say the country will be expected to leave the eurozone- a damaging blow to a broken economy.

However, there is a rival lender available to the former British colony. It isn’t the IMF, and it isn’t the World Bank (both are institutions capable of what has been emotively described as ‘evil’). In an unusual move, the Russian Federation, which is already a major creditor of Cyprus, has asked to begin formal talks for an alternative bailout. The motives behind the offer are not as selfless as they initially appear, obviously. The fact that affluent Russians and businesses, attracted by lower tax rates, have deposited over €30 billion in Cypriot banks.

That said, Russia has not lost interest in lending now that their savings are not at threat. However, a cynic would point out that the viability of the country’s financial system remains in question, and so Putin will throw  however many billions of whichever currency you care to name to protect the Russian elite. It remains unlikely that either lender will offer an alternative course to the rigid austerity which is now damaging most of the western world. Iceland is perhaps the only country which has recovered fully from an IMF intervention in recent times. This is because they were allowed to invest and grow their way out of the problem, without absurd privatisations and tax cuts, exactly as Cyprus should be allowed to.

Oh, and next time, could the government consider increasing Corporation Tax to a more realistic level (i.e. not 12.5%) before grabbing pensioners’ savings?

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?