The Belgian Economist Paul de Grauwe
Mr De Grauwe, have you expected that a bank levy would be introduced in Cyprus?
It came to me as a total surprise that one was willing to put into question the deposit insurance system. This was quite shocking. If now the government excludes deposits up to 100’000 €, they made a full circle. It is really amateurish: first they announce that the deposit insurance is trashed, and after seeing the reaction they step back from this. It is incredible.
Would you trust European officials who say this levy is a one-off measure due to the special situation Cyprus is in and that it will not be applied to other countries?
Of course nobody believes that. Once you put in doubt the deposit insurance of the first 100’000 € which you have installed recently as a basic principle, who can trust these guys? This is very dangerous. If another country like Spain or Italy has now to ask for financial assistance, deposit holders will fear that they may be hit. This could create a self-fulfilling fear of a crisis. The first decision was really a bad idea, even if they will go back on that. They have opened Pandora (PNDORA 614.20 0%)’s box as they considered the possibility of doing this.
What would have been the better alternative?
The common-sense alternative to me was to leave the first 100’000 € untouched, everything above this amount does not fall under the deposit guarantee system. The people who deposited above the threshold took a risk. And for such amounts I do not see a reason not to apply a levy which generates enough funding. It is like a riskier, junior tranche. These are funds of non-residents, mostly Russians. The Cypriot government did not want to do this as it would destroy their banking model as an off-shore centre, with a lot of money from Russian mafia types. These depositors do not have my sympathy. For their risk they also got compensated with higher interest rates than small Cypriot depositors got.
Are the plans of a European banking union endangered by the decision on Cyprus?
The credibility of the whole system is endangered. The idea of the banking union was to prevent banking crises in a particular country from bringing down the government. In the Cypriot case we see a new banking crisis with only very limited willingness to help, instead of sharing the costs.
The population in Cyprus is very angry on their government, even if small depositors are now excluded from the tax. Is it now an emerging pattern in Europe that a democratically elected government has to act against the clear will of their own people?
We see all over Europe that democratically elected governments have to swallow decisions made by others who have no political responsibility. These are technocrats imposing highly political decisions on democratically elected governments who then receive the political sanctions. This was the problem of Mario Monti in Italy. He applied the medicine which was forced on him by technocrats in Brussels who will never get sanctioned for their doing. The governments who have no say in these decisions will be punished. This structure undermines the basics of democracy in Europe. If that is the price we have to pay for the unification of Europe, I would say that it is not worth it.
That is a very harsh statement.
We have reached a high degree of accountability in Europe and we should cherish this. To give up on this in the name of European integration would be a bad decision.
What is your opinion on the position of Germany, which is very strict on their negotiation terms?
It is very worrisome that it looks like that the creditor nations do all the decisions and put strong conditions on the debtor nations. For one, it is based on a wrong diagnosis of the Euro crisis. Southern European countries have of course accumulated too much debt, but this was only possible as creditors in the Northern Europe were giving out this credit. So both were equally foolish, the responsibility is on both sides. Therefore there is no good or bad, no black or white in the question who caused the crisis. But as the creditor nations have the money, they set the rules. This has huge implications in terms of legitimacy. Some countries can impose conditions on others in a very arrogant way. Germany humiliated countries like Portugal and Greece. In the end, this will lead to rejection. People in Southern Europe will say: We prefer being poor to being dictated by the Germans.
The European Central Bank seems to be on the side of the Creditor nations. On the other side, the ECB is expected to keep the Euro crisis nations afloat. Do you see a contradiction here?
The ECB has a very ambivalent position. Last year it said clearly that it is willing to provide unlimited support in the government bond market. But there are many questions marks remaining, especially about the conditionality of the programme. This could undermine the effectiveness when the ECB has to intervene. The ECB tries to be both here: the fire brigade and the police man. It is there to extinguish the fire. But it is only willing to do so, if it can catch those who are responsible for the fire. The combination of these two positions is not optimal. It inhibits the fire fighting capability, if it is conditional. The ECB is now too much of a police man. The central bank is supposed to be politically independent, but imposes as part of the Troika on affected countries highly political conditions. Just imagine: there would be an outrage in the USA, if the Federal Reserve imposed political conditions on the US government.
For this year, is it possible that the market will again be massively concerned regarding the Euro crisis?
There is a plausible scenario that political upheavals could happen and would get out of control. Once that happens, it would be probably too late. The ECB cannot help if the government of a country is politically destabilized. Financial injections will then not work anymore.