By Eric Carlson
The news from Europe has been worse than usual lately. It seems every couple of months
another Eurozone member is mired in a debt or banking crisis. The latest casualty is the tiny
island of Cyprus. At a mere $18 billion in GDP, this resort country is a blip on the economic
radar, but its unique situation threatens the cohesiveness of the entire European Union.
Beyond being a romantic vacation spot, Cyprus is a tax haven for corporations and
wealthy individuals, mostly Russians. The banks are estimated to hold up to 80 billion dollars,
which is 4 times the size of the country’s economy, mostly in foreign deposits. Given banks have
to make money for their shareholders, the Cypriot banks loaned out piles of money to Greek
home buyers during the real estate boom years. Unfortunately, when the you-know-what hit the
fan, these now toxic loans have served to sink the solvency of these banks. If these banks were
allowed to default, the shock wave would ripple throughout the economically integrated EU, and
have negative consequences for the Euro currency. It would also send the stock market in a
likely free fall.
The “brilliant” plan hatched by the EU to fix this problem has been to tax the uninsured
savings accounts of depositors in Cypriot banks. Any account whose value stands over 100,000
Euros is likely to lose up to 40 percent of their value. Just imagine your bank stealing your
savings because of bad decisions it made. The bulk of the accounts that would be subject to this
tax are wealthy Russians who use Cypriot banks as a tax haven and money laundering operation.
Obviously the Russians are unhappy about these transpirations and have made many threats to
Cyprus’ masters, the International Monetary Fund, the European Central Bank, and Germany to
not take their money to help finance a bailout for Cyprus.
In my opinion, the Russians need to suck it up and deal with it. They are upset because
their tax haven has been destroyed. That would be like Mitt Romney complaining if his Cayman
accounts that allow him to pay a lower tax rate than a bus driver were to wash up. Furthermore,
the Russians are claiming the tax is theft. That may be true in the abstract sense, but they are
essentially complaining the money they stole or earned through illicit activities is being stolen.
It’s rather ironic. No one should feel sorry for the plight of mobsters and oligarchs.
The whole situation stinks, especially because the Europeans are trying to shirk free
market forces, but you cannot expect there will be no pain after years of unsustainable economic
practices. The Germans are indeed strong arming the Cypriots and Russians, but they are
justified in doing so. The culture of bailouts for irresponsible countries needs to end. More strict
austerity requirements are not unreasonable from a political or economic perspective. You
cannot run from the market forces forever.