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Eurozone Wobbling Tightrope Walkers

Posted on the 21 March 2013 by Charlescrawford @charlescrawford

Back from sharing with the Croatian Diplomatic Academy some training thoughts on Lobbying and Negotiating in the European Union. With the Cyprus drama helpfully unfolding before our startled eyes.

These fiendishly complex financial/banking negotiations are impossible for normal people to follow, although anyone following my Twitter feed will have seen plenty of superb analytical pieces by different experts.

For example Frances Coppola, who has a superb writing style that explains things in ways even I can understand (sometimes):

The proposed deposit haircut of 6.75% for deposits under 100,000 Euros looks harsh and unfair. And indeed it is. But not because deposits were ever "safe". Compared with the alternative - bank failure, sovereign insolvency and unrecoverable loss of most of their money - this was a good deal for small depositors. And it may still be improved.

What is harsh and unfair is that depositors have been led to believe that small deposits were guaranteed, when the supposed "guarantee" is not worth the paper it is written on. In the Eurozone, deposit insurance is only as good as the ability of the sovereign to honor it. If the sovereign cannot honor it, it is worthless. And that is the situation not only in Cyprus, but also in Greece, Portugal, Ireland and possibly Spain. None of these sovereigns could borrow, print or otherwise raise the money to meet claims under the EU's deposit insurance scheme.

It is time that depositors were told the truth. The lack of a common deposit insurance scheme in the Eurozone means that deposit insurance is a luxury available only to those countries that can afford it - which are also the countries that least need it. Everywhere else, it is a sham.

Or try Beate Reszat, who wonders whether the time has come to retreeat to simpler and more manageable currency arrangements across Europe. Masses of subtle ideas here delivered clearly:

After 40 years experience with regional currency regimes, which eventually all failed, maybe the time has come for European monetary policy to choose a minimalist approach returning to national currencies and focusing on sporadic coordinated discretionary measures to influence market conditions and expectations, and to content themselves with being one stabilising element among others in times of turbulence.

Mitigating transition effects, regaining flexibility, and slowly and patiently restoring credibility and trust in European institutions and processes, taking along all member countries on an equal footing, should be the primary objective. Over 60 years of successful European economic and political integration would be worth it.

More generally, as regular readers here know, on our courses we explain that one way to approach negotiation is to move away from surface Positions and explore instead underlying Interests and Needs. What are those Interests and Needs in the Eurozone fiasco?

It's easy enough to explain the broad case for maintaining pan-European financial stability, even if extraordinary measures are required that set bad new precedents: the possible costs of abandoning the Euro are unfathomable, so doing that looks more risky even than the damaging new policies now emerging. The high tightrope walker with no safety-net is having to perform ever more manic gyrations to avoid toppling off, yet so far those gyrations appear to be working!

But Chaos Theory teaches us that in such radically unstable circumstances even tiny vibrations can set in motion far-reaching bigger changes. And maybe in fact the tightrope-walker starts to think that she/he is just not agile enough to stay on the rope in the conditions now prevailing, however feverishly she/he wriggles. Better to try to stay aloft in the hope that somehow balance and equilibrium can be restored? Or to try to make a controlled but risky jump down from a great height in the hope of hitting the deck under conditions she/he controls a bit?

Or maybe the tightrope walker misjudges her/his own skill, thinking that balance can be maintained when in fact (ie as events will show) a point of no return has been passed?

No 'right' answer on tactics. But for now we can be sure that the highest level guardians of Eurozone stability, namely the ECB inner elite, will do whatever they can to stay aloft. Heck, their professional reputations and salaries are at stake. They have Interests and Needs too, you know!

How about 'Fairness' as a basic Need as it might be said to underpin Trust?

This is hard to call.

On the face of it, it is Not Fair that 'ordinary' Cypriots who have money in the bank supposedly under a legal guarantee up to a certain level should have a slice of that grabbed by the state. Collectivist looting!

Yet as Frances Coppola points out (see above), those guarantees are worth nothing in a state that has bungled its finances to the degree Cyprus has done. All Cypriots have had the benefit of Cyprus scooping in global money via its comfy and not, ahem, invariably transparent tax arrangements. Plus check out this powerful piece by Michael Weiss on the many Russian (and Syrian) angles in the story.

In other words, trying to work out what any given Cypriot 'deserves' in this imbroglio is impossible. Cypriots might hoot that they have been aided and abetted by the European Union in countless ways, so the EU too should suffer. Yet even if there is a logical or accurate point there, it is a morally unworthy one:

I swear by my life and my love of it that I will never live for the sake of another man, nor ask another man to live for mine

What of wealthy Russians who have invested money in Cyprus banks? They have moved funds on a large scale out of their own uncertain country to an EU jurisdiction that treated them more than generously, and that in one way or the other they tried to squeeze in their favour. No-one elsewhere in Europe will cry bitterly if such people now take a sizeable hit.

Nonetheless it is a sign of just how unstable - and weak - the Eurozone now is that top EU folk are rushing to Moscow to see what if anything the Russians might do to help. In such circumstances the Russian elite and their oligarch chums have several advantages, not least a steely cynical far-sightedness. But that does not guarantee that they'll get an outcome they like, and they might just underestimate the no less steely cynicism and acumen of the Germans who are driving EU policy. Chaotic Eurozone collapse could wallop Russia's interests too.

And let's also remember that there is little difference between the state grabbing money from your bank account and the state 'inflating debt away' by debauching the currency. Either way force is being used improperly to cheat you in ways that are less or more subtle, "but it's in your own interests".

UPDATE: Maybe there is a way forward?

Again, the benefit of all this financial sleight-of-hand was the central bank printed money for Ireland today, and Ireland didn't have to pay it back for many years. As Wolfgang Münchau of the Financial Times explains, it was a deliberately convoluted way of printing money for the government to hide that they were printing money for the government.

Cyprus should pull an Ireland, and force the ECB to make a decision. Either the ECB refuses to accept guaranteed natural gas bonds as collateral, and Cyprus gets booted from the euro, or the ECB relents, and the panic subsides.

In other words, make the ECB decide whether the euro is worth printing 5.8 billion euros.


What does it all mean?

Only that we have created financial systems that are in principle so unstable that managing them goes beyond the wits of even the best minds on the planet. The Eurozone is the most staggering example, but there are others. Governments in Europe are fast draining their ability to cope - their blundering moves are too slow and too inaccurate and too inexplicable to the public.

Plus there is one appalling even deeper dynamic in play: demography. As Europe's birth-rates ebb away and older people start to require ever-more expensive healthcare, the longer-term EU 'social model' is in principle unaffordable. So are our fundamental mainstream economic models (based on an historic expectation of paying later for spending now) actually sustainable, when there just may be too few people around in years to come to generate the income to service the debts?

My guess? As trust in the technical capacity of governments to run a currency honorably declines, expect rival innovative systems like Bitcoin to look more credible.

And, as if by magic, dishonest governments fear honest competition and begin to mull new 'regulations'.

This is where the real financial battleground of the next century or so will emerge. Between on the one side states and their tiny privileged elites clinging to the right to control people by controlling (and if necessary stealing) their money, and on the other side millions people demanding the choice to take responsibility for themselves.


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