After months of dithering, the European Union finally acted to save the economy of Cyprus. But the 10-billion-euro helping hand was slapped away in an instant as the Cypriot parliament on Tuesday voted down the bailout by 36 to 0 with 19 abstaining.
The people on that feisty little island in the Mediterranean have spoken, telling their big brothers on the European mainland to keep hands off their savings accounts.
The unprecedented, one-off levy had been proposed as the condition for the EU/IMF bailout. Although the deal was sweetened somewhat at the last minute to exempt savers with less than 20,000 euros, a 6.75% charge on deposits of 20,000–100,000 euros and a 9.9% charge for those above 100,000 euros remained.
And that was too much, too late, for the Cypriots. Too much of a heavy a hand on the savings of ordinary working people; and too late to avert a crisis that has already caused the closure of the stock exchange and banks there at least until Tuesday, to prevent mass withdrawals.
In the view of German officials, Cypriot defiance reflects a reality deficit as much as a financial deficit. German Finance Minister Wolfgang Schaeuble said the public outcry “cannot lead us to make an irrational, unsustainable decision.” He said the Euro Zone as a whole was “very stable,” but cautioned that the situation in Cyprus should not be underestimated. “It is a very serious situation,” he said, and warned that the banks in Cyprus might never be able to reopen if it rejected the bailout. “Someone needs to explain this to the Cypriots,” he said.
Demonstrators outside Parliament explained their own analysis of the crisis by taking down the German flag from the roof of its embassy and carrying unflattering posters of Chancellor Angela Merkel.
The truth is, however, that while the parliamentary vote reflected fierce popular resentment of the bailout terms and those setting the terms, the government has not taken leave of its senses. The big boys in Bonn do not have to explain to the members of Parliament that their country is in serious trouble. Right after the vote-down, Cypriot President Nicos Anastasiades met with party leaders to draft an alternative plan; Finance Minister Michalis Sarris is in Moscow talking with the Russians, who hold multi-billion-dollar investments in Cyprus; and consultations continue with the European Union, European Central Bank and International Monetary Fund.
We do not claim to have the wisdom, financial or political, to know whether the parliament acted in the best interests of the people. On the one hand, we can well understand that, considering that Cyprus is an offshore banking center, whose banking assets represent 800 percent of the national G.D.P., the Europeans want to target that wealth as a surety for the bailout. On the other hand, one can hardly blame the Cypriots for rejecting a demand for financial sacrifices from ordinary people when so much of the wealth belongs to foreign depositors.
More is at stake, of course, than the fate of Cyprus, the third-smallest economy in Europe. In this era of globalization, no economy is an island. All are a part of the continent — Europe and every other continent. That includes the United States, whose banks and investors are also exposed to some extent, and which would not be isolated from a European financial collapse.
Whatever the specific solution in this case — and we are hopeful there will be one — the lesson to be learned from the trauma in Cyprus should not be lost on us.
We should not imagine that all this is peculiar to Mediterranean countries where irresponsible money policy is just a condition of the warm climate. We have our own spending issues — for example, in the northern city of Detroit, where last Thursday a state takeover of the city’s finances was announced.
If the emergency rescue operation in Detroit fails, it would result in what has been described as the biggest municipal bankruptcy in U.S. history. It would be the darkness at the end of a tunnel of decades of economic decline. In the 1950s, Detroit was the fifth-largest American city with 1.8 million people, but now ranks 18th with 700,000.
Kevyn Orr, the attorney appointed as the city’s interim financial manager, said if the takeover of Detroit succeeds, “it will be one of the greatest turnarounds” in U.S. history.
We certainly hope the takeover succeeds, and that Cyprus can be turned around, as well — and that we can all learn the necessary lessons from these painful experiences. Governments both local and national, as well as companies and individuals, must make every effort to avoid ballooning debt before it gets out of hand; before bailouts and bankruptcies overtake us.