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German feel-good feeds growing resentment in Southern Europe

A group of demonstrators hold an anti-bailout rally outside the parliament in Nicosia in Cyprus. Photo: Reuters

It certainly made the German’s feel better. Yet another country, this time Cyprus, had come to them for a bail-out, and more German taxpayer’s money was heading for the bottomless pit that is Southern Europe. Why not share the burden and make some of those pesky southerners pay a bit towards their own salvation, and, as a bonus, claw back some of that dodgy Russian money too?

Sadly the feel-good factor didn’t last long, even in Berlin, as Europe awoke to the sight of queues at ATM machines, and some of Europe’s poorest citizens paying a price for financial sins that were clearly not theirs. Decisions taken on Friday night in Brussels were - by Sunday morning - beginning to look ill-advised, unfair and worst of all counter-productive.

Banking is a funny business. Everyone knows there isn’t enough money in the vaults for everyone to take theirs out at the same time, so the whole thing is based on confidence. One way of ensuring that confidence is for Governments to guarantee savers up to a certain level, currently under EU rules €100,000. This is money that ordinary people should never lose, whatever happens to the bank they choose to put their money in. Try telling that the people of Cyprus this morning, who stand to lose anything up to 6.75% of savings that just 3 days ago were ‘guaranteed’.

Negotiations are still going on in the Cypriot parliament to soften the blow for small savers, but the principle has been breached. By levying a so-called ‘one-off tax’ on savers, Eurocrats have got around their own rules on guaranteed bank deposits, but no one is fooled. The money is going to the banks: who pays tax to a private company? This is simply a means of making savers pick up part of the bill for saving the Cypriot banking system.

Europe awoke to the sight of queues at ATM machines in Cyprus. Credit: Reuters

The idea of enforcing ‘moral hazard’ is an attractive one to some policy makers. It is why Lehman’s was allowed to go under in 2008. The trouble was that enforcing moral hazard was completely counter-productive. Letting one (bad) bank go shattered confidence in all the other (good) banks and threatened the entire financial system, which is why they started bailing out the banks instead. Now a group, led by Germany but supported by Finland, the Netherlands and Slovakia, has decided to have another go. “You put your money into a bank that’s gone bust, you lose (some of) your money”, is the message, except that even those who put money into banks that have not gone bust (eg Barclays Nicosia) are also losing money.

The Cypriot Parliament is deciding today whether to sign-up to the deal agreed in Brussels, and the signs are that - even if the details are changed - they will agree. The alternative of being cut off from EU money and allowing their two biggest banks (Laiki and Bank of Cyprus) to go to the wall would be too damaging, possibly even fatal to Eurozone membership. But there will be a price to pay, not least in the damage to a democratic system where the new President Anastasiades was elected just a few weeks ago on an explicit promise of no losses to bank depositors. Being forced by Brussels to renege on that commitment hardly strengthens the faith of voters in the value if democratic elections.

As to the rest of the Eurozone, there is no sign yet of contagion or of bank-runs starting in countries like Spain or Italy. But the damage to confidence will have been done. If not now, then at some point in the future if the Eurocrisis comes back to the boil, the lesson of Cyprus will not be forgotten: that within the Eurozone your savings are only really safe in Germany.

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