The decision at the weekend to enforce losses of 40% on customers of Cyprus’ Laiki (Popular) Bank if they had deposits over €100,000 has caused outrage in the media on both sides of the Atlantic. Since then plenty of commentators on business TV have said this is the nail in the coffin for Europe, predicting that financial markets will disintegrate and the currency bloc will be plunged into the Dark Ages.
You get the sense from some US business journalists in particular, that the way Cyprus has been treated reaffirms the belief that Europe was always a socialist project and deserves its fate.
This couldn’t be less true. The events that have unfolded in Cyprus in the last week or so highlight the Eurozone’s capitalist credentials and its respect for tax payer money. Here are a few reasons why:
1: Using taxpayer money, even if it is a mere €5 billion, to save a bank that is bust is fundamentally flawed. In a real capitalist economy when a bank goes bust the equity holders, bond holders and then deposit holders (in that order) should take a hit. Europe didn’t quite follow this formula, but it did avoid creating a zombie institution that was dead in the water anyway. “What about the deposit holders?”, I hear you cry. Those who had more than €100,000 in Laiki Bank should have been more careful about where they put their money in the first place. Accumulating lots of cash comes with a responsibility to ensure you keep it safe. It should not be Angela Merkel’s job to ensure that your deposits are secure, even if the Bank you chose to park your money in invested in too much Greek debt and decided to get into international commercial business at the peak of the market in 2008 (as some Cypriot lenders did). It is unfortunate for those who lost money, but it could have been worse. I do believe in paternalistic capitalism, so scrapping levies on deposits under €100,000 seems fair.
2: Far from making the European banking system “un-investable”, it should bolster sentiment towards Europe. If unsustainable zombie banks who get into deep trouble aren’t bailed out anymore, it means there are more resources to save other parts of the financial system that have stronger fundamentals if there is another financial or sovereign crisis. This focuses the European authorities’ and the ECB’s attention on financial institutions that are worth saving.
3: It also saves the German taxpayer from bailing out the mistakes of others. I am stunned by the number of people who are saying that Germany should have “just bailed out” Cyprus as it was such a small sum. Since when should a taxpayer in one country “just bail out” anyone? It is lazy thinking and highlights that the current status quo is flawed if it expects the mistakes of others to be forgiven and papered over every time the going gets tough.
The concept of the “bail in” is here to stay. It is a new way of looking at this crisis and will take some adjustment by capital markets, but it is good news for Europe. It is also closer to the capitalist spirit than those who believe that Germany and co. should keep dishing out money to irresponsible banks far from their shores.