Hey there, time traveller!
This article was published 25/3/2013 (1283 days ago), so information in it may no longer be current.
The masters of Europe made their rules a little more clear this week. They agreed that insured depositors in the banks of Cyprus should be allowed to keep their money. But they insisted Cyprus must contribute 5.8 billion euros to the bank refinancing, alongside the 10 billion euros the European institutions and the International Monetary Fund will contribute.
Different observers are finding different messages in the solution imposed upon Cyprus Sunday night by the European Central Bank, the European Commission and the International Monetary Fund. Nicholas Papadopoulos, chairman of the Cypriot parliament's finance committee, thought the message was that the authorities want to destroy the economy of Cyprus. Some observers in Moscow thought the whole thing was just a German manoeuvre to grab the off-shore wealth of Russian oligarchs.
But for Canadians, the main question was: Does Europe work? The answer this week was: Yes, it does.
It was possible the banks of Cyprus would be allowed to fail and the island would cease to qualify as a member of the European Union and have to abandon the euro as its national currency. Russia might have been willing to step in as the ally and paymaster of Cyprus. This would have suggested that Greece, Portugal, Spain and Italy might be next in line to leave and that the dream of European union would be ending. This road was not taken.
It was also possible that, in order to hold Europe together, Germany and the other solvent countries of the EU would dig down deeper into their taxpayers' pockets and cover a larger share of the Cyprus bailout. This would have invited the victims of austerity in southern Europe to scream louder and make the north pay the debts of the south. This road, too, was not taken.
The Cyprus exercise shows the institutions of Europe are available to reorganize the finances of a member country. It also shows the process is extremely painful for everyone involved. A country will do better to remain solvent than to wait for rescue. Root canal surgery is always available, but it's a whole lot smarter to brush and floss every day.
Cyprus is something less than a country. Part of it is extremely close to Greece ethnically and politically. Another part is run from Turkey, and that part is not under the control of the government located in Nicosia. From 1964 to 1993, the Canadian Armed Forces, along with Irish forces, played a large role in discouraging Greek and Turkish Cypriots from making war on each other. Cyprus is a favourite winter vacation destination for travellers from the United Kingdom and its banks have, until this week, been a favourite tax haven for Russia's super-rich who prefer to keep their money outside Russia.
No other member of the European Union shares these characteristics. But the warning provided by its financial misadventures is timely just the same.
Italian voters in February split their votes among the socialist party, the populist former premier Silvio Berlusconi and professional comedian Beppe Grillo. They booted from office the economic technocrat Mario Monti, who had raised taxes, cut spending and eroded monopolies and privileges in the interest of competition. Italian voters were clearly assuming they need not worry about budgetary balance and improved economic performance because Uncle in Brussels would rescue them if their cheques started bouncing.
Before that idea could spread to Spain and Portugal, it was well for the European authorities to set some limits. Yes, Uncle in Brussels does have a chequebook, but he also has a sharp knife and he does not write the cheque until the pound of flesh has been extracted. Cyprus happened to come asking for help at a moment when the masters of Europe had to make that point abundantly clear. While Cyprus lies bleeding, the other indebted countries of southern Europe may be more inclined to solve their problems internally.