Walker's World: The Cypriot mess

By MARTIN WALKER, UPI Editor Emeritus

PARIS, March 25 (UPI) -- Only a fool would deny the ability of the European Union to concoct some fudged last-minute rescue for Cyprus that keeps the great euro suspense drama limping wearily onward.

But only a bigger fool would deny that the crises keep on coming, that the fudges are looking less convincing and that the long-suffering European voters are becoming less patient.


And only the biggest fool of all would believe that the European economies are showing enough evidence of recovery to make the drama and the losses, the austerity and the unemployment seem remotely worthwhile. If there is any light at the end of the euro-tunnel, it isn't discernible to the human eye.

For the eurozone as a whole, employment has fallen for the 15th consecutive month and last week's Markit Index found both service and manufacturing companies reporting steepening declines in new orders. The detailed reports for individual countries are even worse.


In France, last week's Markit index showed private sector firms reporting more falls in output this month, sinking at their fastest in four years. The latest fall in service sector business activity was the steepest since February 2009, in the depth of the recession.

In Italy, where firms are going bankrupt at the rate of 1,000 a day, the employers' federation Confindustria reports that 29 percent of Italian firms cannot meet "operational expenses," while late payments squeeze cash flow and they can get no credit.

"The Italian economy is being suffocated. The country must intervene rapidly to re-inject funds into the economy," said Telecom Italia Chairman Franco Bernabe.

Italian Finance Minister Vittorio Grilli last week revised the official economic forecasts and said Italy's economy would shrink 1.3 percent this year and 1.7 percent next year. As a result, the country will go yet deeper into debt. In the minister's words, Italy will "increase our potential debt of 20 billion per year in 2013 and 2014, to create the cash on hand."

"Instead of the eurozone economy stabilizing in the second quarter, as many -- including the European Central Bank -- have been hoping to see, the downturn could therefore intensify in coming months," commented Chris Williamson, Markit's chief economist. "Even Germany showed worrying signs of growth fading in March, driven by a return to contraction of its manufacturing sector."


In such circumstances, the extraordinary plan in Cyprus last week to confiscate peoples' savings is starting to catch on elsewhere. Jorg Kramer, the chief economist of Germany's Commerzbank (itself no outstanding model of banking rigor) suggested in the business paper Handelsblatt last week that Italy could solve its problems in the Cypriot way.

"A tax rate of 15 percent on financial assets would probably be enough to push the Italian government debt to below the critical level of 100 percent of gross domestic product," he wrote.

And in Le Monde last week, Paris University economist Bruno Moschetto seemed to be suggesting a similar approach in France in an article titled "No, France is not bankrupt."

"A state cannot be bankrupt, in its own currency to foreigners and residents since the latter would be invited to meet its debt by an immediate increase in taxation," he wrote (note the elegant use of the word 'invited'). "In abstract, the state is its citizens, and the citizens are the guarantors of obligations of the State."

If Europe's leaders seriously want to trigger bank runs across Europe, comments such as these, suggesting that public savings are fair game, seem to be the right way to do it. (And note that an enterprising Spanish bedding firm last week responded to the fears for money held in banks by launching a new line: mattresses with built-in safes.)


But at the same time, Europe's leaders demand no slacking; for many of them, austerity still rules. Lucinda Creighton, Ireland's minister for Europe, declared Friday that her battered island could be "an inspiration for other countries going through difficult times. If they see Ireland re-enter the market, they'll have a sense of hope. We know all about tough decisions in Ireland. Unfortunately, there are no easy solutions. We just have to get on with it."

It is, by the way, interesting to reflect on the role of Europe's islands in this crisis. Iceland, then Ireland, then Cyprus, were all countries with massively swollen banking sectors, seven and 10 times larger than the size of their economy, which plunged into financial disaster. The markets have yet to turn their attention to Malta, another eurozone member with an unusually large banking sector.

The biggest island of all with its own massive financial industry is Britain and Friday the Fitch ratings agency announced it was putting Britain on watch for a downgrade from its AAA credit status. But Britain has some North Sea oil and significant shale natural gas potential. And Cypriot gas looks to be a future ace in the hole if they can finance the liquefying plants and terminals.


Of course, it would make more sense to send the stuff by pipeline to Turkey but the bad politics of Turkey's 1974 invasion and occupation of the north of the island appear to rule that out. If the European Union had any strategic sense, they would make a bail-out for Cyprus conditional on its agreeing the peace settlement with Turkey that Kofi Annan devised in 2004 (and which Greek Cypriots then rejected in a referendum).

That would be a win-win for everybody, particularly for the European Union, which broke its own rules by allowing Cyprus to become a member despite an ongoing territorial dispute.

The European Union did so because they were held to ransom by Greece, which threatened to veto the admission to the European Union of Poland and the other central and Eastern European countries unless Cyprus was allowed to join. The bad blood that engendered toward Greece and Cyprus helps explain the toughness now being displayed by Germany and other EU partners. What goes around, comes around.

Latest Headlines