LONDON (MarketWatch) — A deal was always likely to be done at the last minute in Cyprus.
The sums of money were too small, and the impact of the country chaotically pulling out of the euro too catastrophic, for the two sides not to be prepared to compromise. Late at night, with a deadline looming, the two sides managed to cobble together a deal. The euro staggers on for another day.
But the Cyprus debacle will deepen the depression now starting to grip the European economy. This is no longer a financial crisis — it is an economic crisis. And the collapse of Cyprus will make that a whole lot worse.
The so-called rescue will push one more country into a catastrophic recession. It will provoke an outflow of global funds from the euro-zone. And it will encourage small businesses and depositors to hoard cash. A modern economy can’t function without a healthy banking system. And after Cyprus, no bank in the euro zone can be regarded as safe anymore.
There has been a lot of nonsense written about how the Cypriot economic model was unsustainable. It turned itself into an offshore financial center, its banks stuffed with dodgy Russian money, we are told. In the German version of events — and in Germany, financial markets are always treated with suspicion — they were the authors of their own downfall. If they went broke, it was their own fault. And if they got kicked out, maybe the currency would be better off without them.
None of it was really fair. True, there was a lot of Russian money in the country’s banks. But so what? Despite what you might see in Hollywood movies, Russia is no more dominated by gangsters than many other countries. Moscow is no more corrupt than Las Vegas or Naples. Nor is there much reason to think the Russians parking their money there are dodging taxes. Tax in Russia is very low — a 13% flat-rate income tax and a 20% corporation tax. On the whole, people don’t dodge taxes that minimal — it isn’t worth the risks involved. If they were, they would have been better off paying taxes in Russia than the levies they will end up paying on their deposits in Cyprus.
In truth, banking is a very lucrative industry and there is no reason not to base an economy on it. Plenty of places have massive financial industries without being unstable. What about Switzerland, probably the most stable nation in the world? Or London or New York? Iceland blew up, but as a general rule, financial centers do well. Banking made Cyprus one of the wealthiest countries in the Mediterranean, with a GDP per capita of $30,000, about the same as Spain. If the euro crisis had not destroyed its main trading partner — Greece — and imposed huge losses on its banks it would have carried on getting richer. Since the rest of the euro zone caused the crisis there was no reason not to help it out.
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