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Analysis
Easter rising for the euro

Easter rising for the euro

Monetary version of 19th century Great Game
At last, the Germans don’t give in

by David Marsh

Mon 25 Mar 2013

March in the eastern Mediterranean can be chilly. But nobody in Cyprus expected that, this Eastertide, the banks would freeze up.

The divided island is an appropriately complicated spot for the myriad contradictions of economic and monetary union (EMU) finally to burst to the surface. The chances of EMU surviving the next couple of years with its membership intact look more slender than ever.

The overnight Brussels deal to dissolve Laiki Bank, the No.2 bank, with very large losses for depositors with more than €100,000, is more equitable than the one agreed a week ago and removes the stigma of raiding the piggy-banks of small savers.

But it is still punitively confiscatory. And it raises the question of how the island is going to pay back its huge remaining debt if one of its economic mainstays, financial services, is severely curtailed and many small businesses with legitimate deposits in Cyprus banks now go to the wall.

Emergency lending for Cyprus from the European Central Bank will continue for the time being. But it could easily be turned off if the Cypriots don't implement what they say they have agreed.
 
So we will see nervousness in the markets. Lots of taboos are being broken. Huge losses for depositors, open talk about Cyprus leaving EMU, imposition of capital controls. And the festering dispute with the Russians which can only get worse.
 
Once again, the euro script-writers have excelled themselves. The unrolling EMU saga is God’s gift for international TV news. A beguiling array of ever-changing scenic backdrops with hot-tempered Mediterranean people queuing up outside banks getting angry at the Germans. Any place where the British RAF has to send in a plane with emergency supplies of euro banknotes has to be in trouble. At least they weren't flying in Cypriot pounds – yet.
 
Reach for the dictionary of Hollywood hyperbole. Surely not long before this hits the big screen. No shortage of plot lines. The euro’s Sarajevo moment, 99 years after the assassination of Archduke Franz Ferdinand. High noon for creditors and debtors.

An Easter rising of monetary emotions: a balmy den of financial malpractice and diplomatic intrigue, surrounded by pockets of geopolitical instability, squabbled over by Greece and Turkey, courted by an improbable list of larger powers including Russia, the US and China.
 
A repeat of the 19th century Great Game for control of the eastern Med and the Balkans. A century and a half ago, the British, Turks and Russians jostled over Cyprus for control of the Suez Canal.
 
This time, the struggle is over the future of another artificial, long-planned, much-warred-over construct for joining North and South – the euro.

The Russian government has been taking a conspicuously steely line over the euro for several months. Already the Bank of Russia has been investing in currencies other than the euro (building up large stocks of sterling, for example) diversifying its roughly $500bn worth of foreign reserves.

It wouldn't be surprising if Russian displeasure about its treatment in Cyprus led to some euro selling from Russian reserves in coming weeks.
 
Right on cue for Passiontide in the Christian Church, this is another tale of love and depression, dreams and betrayal.

Cypriot Archbishop Chrysostomos II, representing the Greek Orthodox Church which has declared it is putting its considerable wealth at the country’s disposal, has hoisted his mitre over the debate by calling on Cyprus to leave the euro because it’s going to break up anyway.
 
The Archbishop told a Greek newspaper on Saturday: ‘I'm not saying that [the euro] 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.’
 
Takis Klerides, the former Cypriot finance minister who helped steer the country into the European Union, was quoted in the FT at the weekend saying: ‘We found out the hard way that it’s not a family.‘ He called EMU ‘a dictatorship’ where the bloc’s largest members tell everyone else what to do.

Not entirely correct. It’s a family all right: a dysfunctional one. Someone should have reminded Klerides of the first line of Leo Tolstoy’s Anna Karenina: ‘Happy families are all alike; every unhappy family is unhappy in its own way.’
 
As the last few years have painfully demonstrated, a lot of people opened up the EMU box without reading the small print on the outside of the carton.
 
Klerides’s disappointment is similar to that registered by many in the peripheral states when they discovered that the European Central Bank was not a real central bank with proper lender-of-last-resort powers, that the euro in which they were issuing debt was not their own currency, that no one was benefiting from the one-size-fits-all monetary policy, and that no one – whether in Brussels, Berlin or Frankfurt – was really in charge.

In Cyprus, they do betrayal rather well. The last four acts of Shakespeare’s steamiest tragedy were set there. ‘Think on thy sins,’ Othello tells Desdemona on their final encounter. She pleads: ‘They are loves I bear to you.’ His rasping rejoinder: ‘Ay, and for that thou diest.’
 
For Desdemona, read the Cypriot nation, oscillating in media depictions between the twin extremes of an errant collection of unsavoury money-launders, and, on the other hand a gallant band of hard-working savers persecuted by the Germans.
 
Today’s Othello is none other than Angela Merkel, the German chancellor, this time cast in the mould of a revenging angel bent on salvaging a pound (or euro) of flesh for German savers.
 
Merkel’s tough line over the Cypriots, where for once she is on the same side as the ECB and the Bundesbank, shows how the political atmosphere in Berlin over euro bail-outs is getting substantially harder and less sentimental as the election approaches in September.
 
German voters are telling their politicians that agreeing further loan guarantees for feckless foreigners tied to them (for the time being) via the euro really makes no sense. Especially if savers and house-owners in some of these countries turn out to be richer than the average German.

Nothing that the media-savvy Bundesbank publishes these days is entirely fortuitous. It was no coincidence that the German central bank last week bought out data showing that the typical German household is three times less wealthy than its Spanish or Italian counterpart.
 
In a commentary in June 2012, I wrote: ‘The lesson of economic and monetary union brinkmanship over many years is that the Germans always give in – until the time they don’t. That moment may be approaching.’ A cold pre-Easter weekend in Brussels was the moment when, at last, the Germans didn’t give in.

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