The euro debt crisis is far from over and it is getting worse by the day. Yet, when, in 2010, Greece asked, for the first time, for a bailout, we were told it wouldn’t happen again. All the mechanisms that provide financial assistance to Eurozone Member States in financial difficulties, the so-called bailout funds, the European Financial Stability Facility (EFSF), the European Financial Stabilisation Mechanism (EFSM), and the European Stability Mechanism (ESM) do not work and they are transforming the EU into a transfer and liability union. The measures the EU and Eurozone countries have taken to prevent the spread of the Eurozone sovereign debt crisis have failed. In fact, the eurozone’s response to the debit crisis has exposed its weakness. It has failed politically and economically. The EU leaders have not been able to handle the present crisis and all the EU summit’s conclusions have given nothing else but illusion that they have provided solutions to it. The EU has created all this mess and has proved incapable of sort it out. Cyprus has just been added to the list of bailed out countries, and they got it all wrong again. The way the Eurozone has handled the Cyprus bailout is appalling and has made the crisis even worse.
To recall, on 16 March, the Eurogroup reached a political agreement with the Cypriot government on the key elements of a financial assistance programme and the amount of the bailout. However, the €10 billion bailout would be only provided if there was a contribution of €5.8 billion from Cyprus. The Eurogroup agreed, at Germany insistence, to subject the programme of financial assistance to Cyprus to several measures namely a levy on bank deposits of €5.8 billion, which would have consisted of a 6.75% levy on deposits below €100,000 and a levy of 9.9% on deposits above €100,000. Hence, as a condition for a bailout for Cyprus, the Eurogroup agreed to impose a levy on all deposits in Cyprus's banks. The Eurozone agreed, for the first time, to force ordinary savers to contribute to a bailout. Consequently, they would have lost part of their savings. This is daylight robbery, nevertheless, according to the Eurogroup's president, Jeroen Djisselbloem, "… as it is a contribution to the financial stability of Cyprus, it seems just to ask for a contribution of all deposit holders."
Moreover, it is important to recall that the Deposit Guarantee Schemes Directive (DGSD) requires Member States to establish depositor and investor protection schemes. Presently, depositors are protected up to €100,000. However, under the programme of financial assistance, Cyprus would have had to impose a 6.75% levy on deposits below €100,000 disregarding the fact that they are supposed to be fully guaranteed. Concerns have been therefore raised that by imposing a levy on all deposits in Cyprus's banks the Eurozone could have breached not only EU laws, but also the European Convention of Human Rights. It is well known that there is a massive issue about the rule of law in Europe. Brussels has shown again that in time of crisis the rule of law yield to political aims. By initially agreeing to seize the savings of ordinary people, they were therefore prepared to break the rule that depositors' savings were inviolable and use their legal tricks to cover it up. Jeroen Dijsselbloem has defended the plan stressing that it was in line with the deposit guarantee scheme, because it was a tax. Hence, they were planning to get round the EU’s deposit guarantee laws by calling the depositors' levy a tax. Nevertheless, such measure definitely breaches the spirit of the EU legislation on deposit guarantee schemes.
Obviously, and you could not expect a different reaction, Cypriots have reacted with anger to the government bailout deal. According to Reuters, Markos Economou, a Cypriot, said, "If they vote for this tax they will face the fury of the people". In fact, Brussels is underestimating the fury of the people. Such damaging measure has infuriated not all Cypriots, who would have to pay the price of their country's banking crisis but people all over Europe. People are becoming increasingly angry with the EU.
Unsurprisingly, the announcement of the bailout conditions has caused runs on ATMs, amid uncertainty, and not knowing whether they would have money tomorrow, people wanted to get as much as they could out of their bank accounts. Then, the Cypriot authorities put in place emergency measures to prevent citizens from withdrawing their savings, and ordered the banks to stay closed. There was a limit on withdrawals from ATM machines. People were only allowed to take a maximum of €100 and €120 per day from the Laiki bank and the Bank of Cyprus, respectively.
The Eurogroup said, in a statement, that it considers that “…financial assistance to Cyprus is warranted to safeguard financial stability in Cyprus and the euro area as a whole by providing a financial envelope which has been reduced to up to EUR 10bn.” According to Olli Rehn, the European commissioner for economic and monetary affairs, the deal “reaches essential goals of financial stability and debt sustainability”. There was a general belief, among the Eurozone finance ministers, that failure to agree a bailout for Cyprus could destabilise the entire eurozone. However, the Eurogroup managed to destabilise even more the Eurozone with their first bailout deal to Cyprus. In their desperate attempt to save the euro, by imposing such conditions on the Cyprus’s bail out rather than save the euro they put another nail in the euro’s coffin. Their deal aiming at enforcing fiscal discipline and protect the so-called Eurozone stability has had the opposite effect. It seems that it did not occur to them that their decision to force, for the first time, depositors to contribute with their savings to the Cypriot bailout could create panic all over Europe. They have raised fears that a precedent has been set for other bailed out countries. Since the Eurozone debt crisis the only thing people were able to rely on was the minimum amount that must be protected for savers under EU law on deposit guarantees. Although the Eurogroup has claimed that the bailout conditions imposed on Cyprus would not apply to other Eurozone countries, savers all over Europe, particularly in the bailed out countries, feel insecure about their savings. The Eurogroup's decision on Cyprus has shaken the already limited confidence of European citizens. As Michael Hewson, CMC Markets analyst, said, "If European policymakers were looking for a way to undermine the public trust that underpins the foundation of any banking system they could not have done a better job,".
It has not taken long for the Eurogroup realised that they shoot themselves in the foot and that the conditions they agreed to Cyprus’s bailout, imposing a levy on deposits below €100,000, would destabilize the security of EU deposits. Then, the blame game has started. Nonetheless, the way the Eurozone has been handling the issues has further damaged its already limited credibility and integrity. The disgraceful decision to impose a levy on all deposit banks as part of a bailout for Cyprus has shown that they have no clue on how to handle the debt crisis. It should be noted, that the European Parliament’s political group leaders in the European Parliament Conference of Presidents stressed that the proposed solution for the Cyprus banking sector “was taken behind closed doors in the early hours of the morning without proper reflection on the consequences for ordinary people."
On 18 March, the Eurozone finance ministers held a teleconference to discuss the situation on Cyprus and their generally defended their first decision to force depositors to contribute to the bailout. However, facing turmoil in Cyprus and worried that the crisis could spread to other troubled eurozone countries, the Eurogroup has decided to reconsider their initial deal. In a statement on Cyprus, the Eurogroup’s President reiterated, “the stability levy on deposits is a one-off measure.” He noted, “The Eurogroup continues to be of the view that small depositors should be treated differently from large depositors” and reaffirmed “the importance of fully guaranteeing deposits below EUR 100.000.” The Eurogroup agreed that Cyprus could change part of the deal, but stressed that it won’t provide more than €10bn. Consequently Cyprus would still be required to contribute with the same amount of money.
The President of Cyprus, Mr Anastasiades, said that he had the choice between accepting the bailout terms, with the levy on deposits, or exit the Eurozone and face bankruptcy. He has attempted to win support for the bailout by removing any levy on savings below €20,000. Hence, Cyprus would have imposed a 6.75% levy on bank deposits of €20,000 to €100,000 and a levy of 9.9% on bank deposits over €100,000. However, this was not enough to convince the Cypriot parliament, which overwhelmingly rejected the proposed deposit levy as a condition of the €10 billion bailout. The German finance minister, Wolfgang Schaeuble, immediately warned Cyprus that the European Central Bank (ECB) would pull the plug on Cyprus’s largest banks if there wasn’t a bailout programme. In fact, on 21 March, the ECB, keeping the pressure on Cyprus, said, in a statement, “The Governing Council of the European Central Bank decided to maintain the current level of Emergency Liquidity Assistance (ELA) until Monday, 25 March 2013.” Then, “Emergency Liquidity Assistance (ELA) could only be considered if an EU/IMF programme is in place that would ensure the solvency of the concerned banks". The ECB gave therefore a final warning that emergency liquidity assistance to Cyprus’s biggest banks would be cut off if the government failed to agree on a plan B to raise €5.8bn, demanded by the Eurozone, for its bailout by Monday. The collapse of its two biggest banks would have left Cyprus bankrupt.
Time was therefore running out for Cyprus to find financial assistance and avoid bankruptcy. Noting that Cyprus could not sustain more debt, the EU and the IMF made clear that they wont loan more than €10 billion and that Cyprus would have to make contrition. Thus, the main issue has been who is going to pay for the Cyprus’s banks bailout. Cyprus was desperate to find a plan B to raise the €5.8 billion, and has decided to turn to Russia again. Cyprus has already a €2.5 billion loan from Russia, and Cypriot Finance Minister, Michael Sarris, was seeking a further €5 billion. The Eurogroup has clearly showed its struggle to come up with a consistent response to the situation. Forcing Cyprus to ask Russia help is a sign that Eurozone is unable to solve its own issues. The way the Eurozone has dealt with the Cyprus crisis was described by Dmitry Medvedev, Russia’s prime minister, "So far actions of the European Union, the European commission together with the Cypriot government regretfully resemble a bull in a china shop to me." In fact, as he said, "It seems to me that every possible mistake that one could have done in this situation has already been done."
Cyprus had until Monday 25 March to come up with a plan B to raise 5.8 billion euros to be approved by the EU and the IMF in order to have the 10 billion euros bailout or face bankruptcy. It has been reported, that this time, it order to prevent contagion to other bailed out and troubled eurozone countries, the eurozone, if no agreement had been reached, was ready to expel Cyprus from the Eurozone. It is important to note that the EU Treaties provide no exit clauses from the EMU, but the Maastricht Treaty provide for its irrevocability.There is no clause in the EU Treaties that allows a member state to leave the Eurozone and remaining, at the same time, a member of the EU. The Treaties would have to be amended to achieve such outcome. Consequently, one could say that, legally, it is not possible to unilaterally exit the euro as under the Lisbon Treaty (Article 50 TEU) member states may withdraw from the EU but not just the euro. However, the EU leaders would have found a way to go through with their political decision to let Cyprus exit the Eurozone. And, one may say, exit the Eurozone could have been the best option for Cyprus.
Facing a deadline to come up with a plan B before the ECB withdraws its emergency lending programme from the two biggest banks, on 22 March, the Cypriot Parliament approved an emergency reform package aiming at convincing the Eurozone to agree to a bailout deal and avoid bankruptcy. They adopted legislation allowing Cyprus banking sector to be restructured. They also voted for Cyprus to become the first Eurozone country to introduce capital controls.
Olli Rehn, noting that Cyprus had only be left with “hard choices”, said “Unfortunately, the events of recent days have led to a situation where there are no longer any optimal solutions available”. Once again, the Eurozone had to rush trough last minute solutions. In the early hours of Monday 25 March, just hours before the ECB’s deadline, the Eurogroup and the Cypriot authorities reached a last-minute decision and agreed a second deal on €10bn bailout for Cyprus. The deadline set up by the European Central Bank to avoid a full collapse of the banking sector and bankruptcy in Cyprus has been met. But, it has been appalling the way the Eurogroup has dealt with the situation. Jeroen Dijsselbloem said on 25 March, "We've put an end to the uncertainty that affected Cyprus and the euro area over the last few days." In fact, only after public anger, serious protests by Cypriots, the Cypriot parliament rejection, the ECB’s threat to cut off liquidity to Cyprus’s biggest banks, if a bailout agreement were not reached, the ludicrous decision endorsed by the Eurogroup that all Cypriots with a bank account would have to lose part of their bank savings to contribute to the so called bail-in has been reversed. Such decision has created fear and uncertainty in all Eurozone countries. They might have agreed on a new plan but depositors’ trust has already been shaken, and trust and confidence won’t be recovered overnight.
Under existing EU law on deposit guarantee schemes, EU Member States are required to protect the first €100,000 of savings in the event of a banking crisis. However, even this principle was recently challenged by the initial plan to impose a 6.75 percent levy on deposits below €100,000 as part of the Cypriot bailout. The Eurogroup’s recent statement on Cyprus stressed, that the measures will “safeguard all deposits below EUR 100.000 in accordance with EU principles.”
In return for a bailout of €10 billion, Cyprus agreed to restructure its banking sector. Cyprus had no choice but to accept to cut its banking system, as told by the Eurogroup. The controversial levy that would have been imposed on bank deposits below €100,000 is no longer a condition for the bailout. Under the new deal, depositors with savings worth less than €100,000 would not be affected.
The new bailout agreement is similar to what Germany initially proposed, merging Cyprus’s two biggest banks, Laiki and Bank of Cyprus, creating a “good” and a “bad” bank. Under the initial German’s plan, both banks would have been liquidated, which would have forced big losses on large deposit holders. In fact, German Finance Minister, Wolfgang Schäuble, said, "It can't be done without a bail-in in both banks… This is bitter for Cyprus but we now have the result that the [German] government always stood up for". The Cypriot president has tried to avoid losses on large bank deposits. He wanted to save the two bigger banks, but then he insisted that the Bank of Cyprus should survive. It should be bear in mind that banking is Cyprus main industry. It is important to recall that according to Angela Merkel, “Cyprus must realise that its business model is dead”. Germany has slammed Cyprus economic model, and described it as 'a casino economy' and a 'dysfunctional business model'. It is now telling Cyprus what business model it should pursue. Even, Luxembourg’s foreign minister said, "Germany does not have the right to decide on the business model for other countries in the EU". However, since the beginning of the euro crisis, Germany has been trying to impose its domestic economic model on other member states.
In return for bailing-in the banks, Cyprus will receive a €10 billion bail out. The new Cyprus's bailout is the first Eurozone bailout, which has imposed significant losses on deposit-holders. The troika, and then the Eurogroup, have insisted that bailout money could not be used to recapitalise banks. Hence, they decided that the recapitalisation of the two biggest banks in Cyprus should be taken on by the deposit-holders of more than €100,000. Consequently, large deposit holders, in the Bank of Cyprus and Laiki Bank, will have to contribute to the bail in, and face losing a large amount of their money. Under the new bailout’s conditions, Cyprus second-largest bank, Laiki Bank, will be shut-down and all its deposits worth more than €100,000 will be placed in a “bad bank”, whilst smaller deposits including insured deposits below €100,000, will be transferred to Bank of Cyprus, to create a "good bank". It has been reported that uninsured savers at Laiki bank might face losses of up to 80 percent. Deposits in Bank of Cyprus worth over €100,000, which are not guaranteed under EU law will be frozen and then used to recapitalise the bank. Although the amount of the “haircut” has not been decided yet, the Bank of Cyprus’s savers with more than €100,000 in their accounts could lose up to 60 per cent of their savings. Several individuals will see their cash reserves run down and companies will go bankrupt.
The Cypriot authorities have introduced emergency measures and Cypriot banks have been closed since the Eurogroup took the outrageous decision to impose levies on all bank deposits. Hence, for two weeks Cypriots have been queuing at ATMs trying to get as much money as they could. The Cypriot banks were reopened on 28 March, but in order to avoid bank runs, and prevent investors from taking their money out of Cyprus, the Cypriot Parliament approved emergency legislation, which has made Cyprus the first Eurozone country to impose capital controls. Such measure clearly shows that the country has lost control over its economy. The capital controls measures apply to all Cyprus’s banks and include restrictions such as a limit of €300 per day on cash withdrawals, a ban on cashing cheques, restrictions on sending money abroad, limits on cash that can be taken abroad per person. All commercial transactions and private transactions over €5,000 and over €200,000 respectively would be scrutinised. Cyprus’s Finance Minister, Michalis Sarris, announced that the capital controls would be imposed for a seven-day period and then re-assessed. But, it remains to be seen for how long they will be in place.
This is the first time a eurozone country introduces capital controls and one might wonder whether such measures do not breach the Treaty provisions on freedom of capital across EU countries, which is at the heart of the single market. The Eurogroup noted the Cyprus’s decision to introduce measures imposing capital controls, but stressed, “these administrative measures will be temporary, proportionate and non-discriminatory, and subject to strict monitoring in terms of scope and duration in line with the Treaty.” On 28 March, the European Commission issued a statement pointing out that Cyprus imposed capital controls “as part of a series of measures to prevent the significant risk of uncontrollable outflow of deposits which would lead to the collapse of the credit institutions and to the immediate risk of complete destabilisation of the financial system of Cyprus”, and that such measures entail “temporary restrictions on the free movement of capital”. The European Commission noted “Member States may introduce restrictions on capital movement, including capital controls, in certain circumstances and under strict conditions on grounds of public policy or public security” and “for overriding reasons of general public interest.” The Commission believes that “In current circumstances, the stability of financial markets and the banking system in Cyprus constitutes a matter of overriding public interest and public policy justifying the imposition of temporary restrictions on capital movements.” Stressing that “the free movement of capital should be reinstated as soon as possible in the interests of the Cypriot economy and the European Union's single market as a whole”, the Commission said that it “will monitor closely with the Cypriot authorities, other Member States, the ECB and the EBA the implementation of the imposed restrictive measures on capital movements.”
It is important to note that the ability of moving money without any restrictions is intrinsic to a monetary union. As Guntram Wolff, director of the Brussels-based Bruegel think tank, said, "If this is restricted, the value of a euro in a Cypriot bank becomes significantly inferior to the value of a euro in any other bank in the euro area.” Then, he stressed, “Effectively, it means that a Cypriot euro is not a euro anymore.” Thus, the Cyprus bailout challenges a basic rule of the single market and one of the main reasons for having a single currency, free movement of capital. One could say the introduction of capital controls is the beginning of the end of the monetary union, at least for Cyprus.
The way the Eurozone has been dealing with the Cyprus’s crise has also shown the massive issue about the rule of law in Europe. The EU makes the law, claims it has a legal framework for the rule of law, and then breaks the rules itself. Brussels is calling upon member states to implement and obey to the fiscal and economic governance rules, yet it has no credibility. The EU 'doesn't always practice what it preaches. The EU leaders, Mr. Barroso and anybody else in Brussels have turned a blind eye to breaches of the EU Treaties to save the euro. The Eurozone is breaking the rule of law again; they are once again seeking to reach their political objectives regardless the rule of law in the EU. Vladimir Chizhov, Russian ambassador to the EU, in an interview with EurActiv, said, as regards the Cypriot bailout, “I have to assess this against the EU’s lofty words about values. The haircut is hardly consistent with sanctity of private property. Whereas capital controls – limiting money that can be spent on anything, including even education, or transferred abroad – these are not compatible with the freedom of movement of capital, a basic EU principle.” Then, he stressed, “All this makes the point of a union based on values rather bleak, with due respect to the complexity of the situation of course.” Such comment is a deep embarrassment to the Eurogroup and they should be ashamed.
Jeroen Dijsselbloem created further uncertainty and instability when, on the same day the new agreement was reached, in an interview with the Financial Times, he suggested that the Cyprus' bailout could be a template for future eurozone bank restructurings. Brussels has been stressing the so-called bail-in is a specific measure to Cyprus, however the Eurogroup president comments have reverse this. According to Jeroen Dijsselbloem markets have been relatively calm in recent months and have not panic following the decision to force private investors and depositors to pay for the bailout of Cyprus’s biggest banks, consequently this could allow the Eurozone to use private money when banks failed. He suggested that the Cyprus's bailout deal whereby shareholders, bond holders and uninsured deposit-holders will face substantial losses could be used in future Eurozone bank bailouts. He said that if a bank can't recapitalise itself “…then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders". Jeroen Dijsselbloem has made clear that the Cyprus bailout approach which involves a 40% haircut for savings over €100,000 is now the template for all Eurozone countries. Unsurprisingly, such comments provoked an immediate negative reaction on financial markets. Obviously, citizens all over Europe, particularly from Spain, Italy and Portugal, fear the worst. If they have over €100,000 in savings, in eurozone banks, Mr Dijsselbloem's comments have at least disturbed their sleep. By making such statement, the Eurogroup’s president is telling investors to take their money out, from eurozone banks, as soon as possible.
It is important to recall that the Eurozone leaders have been discussing whether the ESM could be used to recapitalise banks directly, rather than having to lend first to member states. Ms Merkel has been against the idea of having the bailing-out fund directly injecting capital into banks. The Eurozone leaders agreed last June, “When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly”, under specific conditions. Merkel has agreed to allow the ESM to recapitalise ailing banks directly, without having to go through governments, but it can only happen after a Europe-wide banking supervisory body, run by the ECB, is set up. But, it seems, the Cyprus bailout agreement has killed such idea, as none of the €10bn in bailout funds will be used to recapitalise banks. Mr Dijsselbloem also said "We should aim at a situation where we will never need to even consider direct recapitalisation,". He had therefore suggested that the use of bail-ins would make it unnecessary to put into effect the recent agreement allowing the ESM to be used for direct bank recapitalisation. Spain as well as Ireland was expecting to use the ESM to recapitalise its banks. Reacting to the Eurogroup President’s comments, Mr Rajoy said, "I am not in agreement with that, and I will defend my position". He believes banking recapitalization should be done through the ESM, not through the deposits of savers.
The Luxembourg, Spain and France suggested that the approach used in Cyprus should not become a ‘template’ for the rest of the Eurozone. The European Commission and the ECB have also been trying to reassure the public, and the markets, that the Cypriot bail-in model is not a "template" for future bank restructuring. According to Benoit Coeure, ECB board member, "Dijsselbloem was wrong to say what he said … Cyprus isn't a model for the rest of the euro zone." In fact, the Eurogroup’s president, later, on the same day, issued a statement, trying to retract from his previous comments. He said, “Cyprus is a specific case with exceptional challenges which required the bail-in measures we have agreed upon yesterday.” He then stressed, “Macro-economic adjustment programmes are tailor-made to the situation of the country concerned and no models or templates are used.” However, the damage had already been done. Nonetheless, it seems that the ‘bailing-in' of large deposit holders would be part of the EU response to troubled banks.
Although the European Commission has rejected that the solution to the Cypriot problem could be used as a template, Chantal Hughes, spokeswoman for Michel Barnier, the European commissioner for the Internal Market, said, "It is not excluded that deposits over €100,000 could be instruments eligible for bail-in”. It is important to recall that the European Commission, in June 2012, put forward a draft directive establishing a framework for the recovery and resolution of credit institutions and Investment firms, the so-called draft Bank Recovery and Resolution Directive, already foresees the possibility for ‘bail-ins’. The proposal reads, “The bail-in tool will give resolution authorities the power to write down the claims of unsecured creditors of a failing institution and to convert debt claims to equity. The tool can be used to recapitalise an institution that is failing or about to fail, allowing authorities to restructure it through the resolution process and restore its viability after reorganisation and restructuring.” It then stresses, “in order to ensure that the bail-in tool is effective and achieves its objectives, it is desirable that it can be applied to as wide a range of the unsecured liabilities of a failing institution as possible.” The Commission has proposed that the bail-in tool provisions would apply from 1 January 2018. The draft proposal excludes from the scope of application of the bail-in instrument, the “deposits that are protected under Directive 94/19/EC26 of the European Parliament and of the Council of 30 May 1994 on deposit guarantee schemes, to liabilities to employees of the failing institution or to commercial claims that relate to goods and services necessary for the daily functioning of the institution.”
Unsurprisingly, the Eurozone leaders, the European Commission, the ECB, and the European Parliament are divided on whether large bank deposits should be used to bail in troubled banks. They have therefore been issuing contradictory messages, as we have been told that Cyprus is a special case, and it would not be a template for future Eurozone bailouts, which are creating even more uncertainty and instability. Investors might start looking at Southern Eurozone countries as possible countries to be subject to bail-ins, which would then fan the flames of the crisis. The situation in Cyprus has created a new level of uncertainty in the banking sector, and, obviously people cannot avoid thinking whether it can also happen in other eurozone countries. The Eurogroup’s decision to give Cypriot private deposits a haircut has opened up the precedent that citizens will have to pay with their savings the price of the Eurozone’s mistakes. The way the Eurogroup has addressed the Cyprus crisis and the way the bailout negotiations were handled, has further undermined the credibility of its response to the euro crisis. The Eurogroup, with its damaging decisions on the Cyprus’s bailout, has created uncertainty and people have started losing faith on the European banking system. In fact, have started losing faith on their political representatives and their capacity to resolve the current crisis.
According to Christos Stylianides, the Cypriot government spokesman, "Finally, Cyprus has ended a period of uncertainty and insecurity for the economy. A disorderly default was avoided, which would have meant leaving the euro zone, with devastating consequences,". However, uncertainty and insecurity are far from over. In fact, Cyprus' foreign minister Ioannis Kasoulides, according to the EUObserver said, "I refuse to speak of solidarity. Europe is pretending to help us but the price to pay is too high: nothing less than the brutal destruction of our economic model which will cause enormous, long term difficulties for the Cypriot people." Cyprus was forced to accept bailout conditions that will have harmful effects, as its main source of income and employment, its offshore banking sector, is being knocked down. The Laiki bank is about to be shutdown and there would be thousands of job losses. There is also a Cypriot austerity programme, which entails tax rises, spending cuts, healthcare and pension reforms. There are also the restrictions on the free movement of capital, foreign direct investment in Cyprus is also likely to decline, the lack of confidence in the banking system and the general atmosphere of uncertainty will deeper the recession in Cyprus. According to the European Commission the Cypriot economy will contract by 3.5 per cent this year. Yet, Cypriots had no say. In fact, the Cypriot parliament was not even allowed to vote on the last deal. It has been argued that most of the legislation required to implement it has already been passed, but the fact that the bailout deal requires the approval of Eurozone parliaments, including Germany, but not from Cyprus raises questions about democratic legitimacy.
As Bill Cash has been saying the real problems are contained in the existing treaties and they are the reason why we have the crisis in Europe. The EU by moving towards greater integration, and by refusing the results of referendums, it has created this implosion. The EU has created all this mess and has proved incapable of sort it out. Since the bailout, Greece has not cut its budget deficit. The austerity measures have not reached the desirable outcome. In fact, if ever any more proof was needed that the bailouts do not work, they are just piling up debt, it is the Greek and Portuguese current situation. First Greece, then Ireland, Portugal, and Brussels has not learned the lesson yet, and continue to pursue its failed policies. There have been innumerous European Council, Ecofin and Eurogroup meetings but they have failed to come up with a successful response to the crisis. The Eurozone leaders have not been able to handle the crisis. And now, the way eurozone has handled the Cyprus bailout is appalling and has made the crisis even worse. As Bill Cash said, “this is symptomatic of the dysfunctionality of the European Union”. The handling of the Cyprus bailout has shaken the trust of citizens and markets on the Eurogroup ability to move the Eurozone out of the crisis and create financial stability and economic growth.
How the eurozone would get out of the mess remains to be seen. Mario Draghi, the European Central Bank president, said he will do "what it takes to save the euro." In fact, Brussels is doing whatever it can to save the euro, but rush solutions, contradictory statements, particularly when laws are broken, cannot proven to be useful. The Cyprus bailout, once again, has shown Brussels blind determination to save the euro at all costs, regardless of the misery caused upon citizens of the bailed out countries. Greece, Portugal, Ireland, Italy, Spain, Cyprus are being sacrificed to save the euro. By accepting the bailouts those countries have lost sovereignty over economic and financial policy and this strategy cannot solve any problem. The Eurozone, particularly Greece, Portugal, Ireland, Italy, Spain, and now Cyprus would have more debt, more unemployment and more recession. The austerity measures imposed by Brussels, particularly on the bailout countries, are not working and social conditions and living standards are getting worse. These countries face a long period of stagnation, high unemployment, and painful structural reform. These measures have been forced onto citizens, however they were not allowed to have a say on such important matter affecting them. The financial crisis and the austerity measures have lead to further democratic deficit and lack of legitimacy not only at Europe but also national level.
One could wonder whether the bailed out countries would be able to continue to implement the austerity measures with their population protesting on the streets. There have been demonstrations against the austerity measures all over Europe. The Italians, the Portuguese, the Spanish, the Greeks, the Cypriots are extremely unhappy with the EU’s austerity measures and with the lack of democratic legitimacy. They are unwilling to accept more national sovereignty being given away. In fact, they would say NO to a fiscal and political union with an economic policy imposed by Germany. However, they have not been asked whether they would accept it. People have been treated with contempt, and it is about time Brussels start listening to people democratic wishes. As Martin Callanan MEP rightly pointed out, “… if we remove voters’ ability to determine their own economic destiny then we start the countdown to social unrest.”
The euro debt crisis won’t stop with Cyprus, and further bailouts will be needed. However, as Bill Cash, has been saying there will be no money to pay for further bailouts and Germany‘s conditions will not be met. Germany has taken the lead in the eurozone's response to the crisis, insisting on austerity measures to bring budget deficits down before it agreeing to any bailout. The Cyprus bailout has shown that Member States, particularly Germany, are no longer willing to pay for the debt of other Eurozone countries to avoid defaults. It is important to note that Germany has insisted on Cyprus unprecedented bailout conditions. But, it should be bear in mind that the German taxpayers are the biggest contributors to the EU financial aid facilities. Germany will not be able to carry the burden of this debt transfer union for too long.
In the other hand, Germany is defending its interests at expense of smaller member states.
Cypriots, as the Greeks, the Portuguese, Irish, Spaniards, Italians, will face years of austerity measures to bring their debt down. One could wonder whether getting out of the Eurozone would be a better option for these countries. The costs of that member states exit of the Eurozone would be temporary whereas the costs of keeping the euro would be unsurpassable. The Cypriot dramatic situation has raised the prospect of the country leaving the euro. In fact, according to a poll by Prime Consulting 67.3 percent of Cypriots would be happy to leave the euro. According to the leader of the Cypriot orthodox church, Chrysostomos II, "The euro cannot last. I'm not saying that it will crumble tomorrow, but with the brains that they have in Brussels, it is certain that it will not last in the long term, and the best is to think about how to escape it." Moreover, Paul Krugman, the Nobel Prize-winning economist, also believes Cyprus needs the leave the euro immediately in order to save its economy.
It is well known that Mr Barroso is planning to create a federation of nation states, as he believes that a creation of a federal Europe is the only possible way to address the causes of the sovereign debt crisis. However, the answer is not “more Europe”. The history of the EU has proved that further surrender of member states’ national sovereignty is a recipe for failure. Brussels’ assumption that the only possible way to overcome the euro crisis is through further integration, is wrong and, if they continue to follow this path there would be irreversible consequences. It is important to recall that the euro was intended to create stability, complete the Single Market, eliminating exchange rate risks and foreign transaction costs, stimulate economic integration, and ultimately to generate growth and employment. However, the state of economic activity continues to deteriorate, particularly in the eurozone, as it continues, and will continue, to face low growth or no growth, mass unemployment and excessive debt. Recent figures published by the Eurostat, clearly show that the eurozone recession has not gone away. According to the Eurostat, “GDP fell by 0.6% in the euro area (EA17) and by 0.5% in the EU27 during the fourth quarter of 2012, compared with the previous quarter”. The European Commission’s winter economic forecasts have also confirmed that the eurozone will remain in recession in 2013. The EU's economy will continue shrinking this year. The GDP will shrink 0.3 percent in 2013 in the eurozone. Moreover, in February 2013, the euro area and EU unemployment rate was 12% and 10.9% respectively, whereas in February 2012, they were 10.9% and 10.2%. There has been therefore a considerable increase compared to February 2012. According to the Eurostat, the lowest unemployment rates were recorded in Austria (4.8%), Germany (5.4%), Luxembourg (5.5%) and the Netherlands (6.2%), and the highest in Greece (26.4% in December 2012), Spain (26.3%), Portugal (17.5%), and Cyprus (14%). Particularly, youth unemployment has risen to utterly unacceptable levels. The highest youth unemployment rate was registered in Greece (58.4% in December 2012), Spain (55.7%), Portugal (38.2%) and Italy (37.8%). These figures clearly show the differences between the Northern and Southern EU Member States. The euro is creating uncertainty, hostility and a division between north and south of Europe. In fact, it is creating social unrest throughout Europe. The Eurozone must accept once and for all that the Euro is unsustainable before the situation gets worse and then it would be too late. Bill Cash wrote, in 2004, in his pamphlet, The Strangulation of Britain & British Business, “A country‘s being locked into a low growth, high unemployment, supranational system of economic management is a dangerous state of affairs that is bound to lead to increasing social unrest”. Taking into account the current state of affairs, a popular revolt might be on the Eurozone cards.
As Bill Cash has been saying the only hope for a stable Europe is if it is based on national democracy. The answer to Europe is to consolidate democracy in each of Europe‘s nation states. Hemce, if the UK as well as other member States want to regain their democracy and economic stability they must return to an EFTA-plus arrangement.
