So the eurozone crisis is back with full force. Did it ever really go away?
I don’t propose to try and recap the events of the last few days in Cyprus with the bail-in of bank depositors, things are moving quickly enough that I would be out of date almost immediately. Instead, let’s focus briefly on the precedents that seem to have been made.
It seems that recent weeks have brought the eurozone crisis two new sets of headaches. The first is from the Italian elections and the 25% share of vote won by Beppe Grillo and his 5 Star Movement. Whatever else it may be, it is a clear message from the Italian electorate that they demand change. Grillo’s message is very clear and it is not at all supportive of either the EU or the euro.
Having already had a technical government under Mario Monti, Italian’s have had the chance to decide whether they like the idea of austerity and reform. The answer appears to be a clear “no”. It is difficult to blame them, but it means that from here on the Troika, or any part thereof, is going to find it very difficult to impose financial rules in Italy.
From Lorenzo Bini-Smaghi in his FT blog about the election result in Italy: â€śAusterity is the result of countriesâ€™ democratic decisions to wait until the last minute before acting, under the pressure of the markets, mainly by raising taxes rather than implementing long-waited reforms. Denying this, by claiming that austerity has been imposed on countries â€“ rather than self-inflicted â€“ and looking for scapegoats, is the biggest threat to democracies going forward.â€ť
It seems that the Italian people would like to wait some more.
What for the rest? It seems hard to imagine that this makes it easier for the Troika to impose it’s will elsewhere now, a point that has been underlined by the Cypriot parliament voting against the bail-in of small bank depositors. If little Cyprus can stand up to the big boys, what about Italy or Spain?
Whether a Banking Union could have prevented this is open to discussion (I presume not), but since it has been gently sidelined as an idea (here) it won’t be helping. Once again it is clear that the banking sector and it’s inability to operate safely is the cause of much of the problem. As I have mentioned before (here) Europe can’t bring in much stronger banking regulations soon enough if it is to survive.
This leads on to the second problem. The banking sector is very weak in many EU countries currently. The current issues in Spain and Italy come leaping to mind, but there must be problems in many other countries too. With a precedent set that a national bailout might require your personal savings to be used, I wonder how many people in eurozone countries other than Cyprus are currently withdrawing their life savings?
Over the last two years or so capital flight has been a problem, one that caused many economists to worry about the “Target 2″ system (I don’t understand it well enough to try and explain it) and whether that might bring down the banks. If people with savings were worried about them then, I presume that they must be more worried about them now. It would seem logical.
If this starts a wave of cash withdrawals from eurozone banks it could well expose weaknesses in other unexpected places.
Having closed the Cypriot banking system for several days, it is hard to imagine that confidence will immediately be restored if and when they open their doors. Rather, the general public in Cyprus will likely queue for hours to try and empty their accounts to salvage what they can. In banking, confidence is everything and when it is gone, it is gone.
Will Cyprus still be in the eurozone by Monday?