The Eurozone’s central bank is taking advantage of the Cyprus crisis to pursue European banking union through an open contest between the strongest and weakest countries, argues Emiliano Brancaccio
We still do not know the outcome of the banking crisis in Cyprus but we can already draw some lessons from it for the future. Many commentators have drawn inspiration from it to evaluate the possible consequences of a tax on bank deposits. For Mark Onado, a compulsory levy on deposits Cypriots would raise doubts about the value of current accounts throughout the EU and could create a “disastrous snowball effect” for the entire European banking system.
But there are other threats on the horizon. The Cyprus crisis creates a precedent that is in some ways even more dangerous: I refer to Thursday morning’s statement by the Governing Council of the European Central Bank that the emergency liquidity to the Central Bank of Cyprus will be provided only until Monday. After that date, the provision of liquidity by the ECB will be conditional on the ratification of an agreement between the Government of Cyprus, the European Union and the International Monetary Fund that guarantees the solvency of the banks affected by the crisis.
What are practical consequences of this?
Alessandro Merli, Il Sole 24 Ore, described the ECB’s ultimatum in the following fashion: “The ECB initially said it would await the decision on the rescue plan before deciding on the continuation of the provision of liquidity. Now it has chosen to exert pressure for an agreement, aware that the continued uncertainty of Cyprus may have an impact on the rest of the eurozone banking systems.”
The interpretation proposed by Merli is in evidence in the official reports of the Governing Council and other European institutions. But a less benevolent view can be taken of the ECB ultimatum. That is, that the ECB is, in fact, ready to close off the channels of distribution of liquidity in the midst of a delicate negotiation on how to recapitalize banks in crisis. If you think about it, this is an unprecedented level of political interference: even in comparison with the infamous letter Trichet and Draghi sent to Italy’s Berlusconi government in summer 2011.
The statement could therefore indicate that the Governing Council of the ECB is once again dominated – and in an explicit fashion – by the uncooperative game of the “hawks” of the Bundesbank. This game aims to reduce the time for political mediation to force the liquidations of distressed financial institutions and the consequent restructuring of the European banking system. The ultimate goal of the strategy: to promote a “Darwinian” style banking union, not dictated by political compromises, but by an open contest between the strongest and weakest countries.
Some might argue that the Cyprus case is exceptional and that conclusions should not be drawn from it on the future action of the Executive Board of the ECB. Three years of the eurozone crisis, however, should have taught us that the very worst exceptions of European economic policy tend to become pernicious general recipes. If so, we may be dealing with a uncoordinated and brutal process of European Banking Union, something that is very different than what proponents appear to have been calling for.
Such a perspective should be a warning for Italy and other ‘peripheral’ Eurozone countries. In fact, if the economic policy scenario does not change and the divergences between the eurozone economies persist, it is clear that the gap between the results of operations of the banks of the member countries is set to expand. Should the ECB demonstrate in the future its intention to force the issue of bank restructuring, there is reason to fear that Italy and other peripheral countries would arrive at the appointment of “Darwinian” selection in the uncomfortable role of debtors to be liquidated according to the conditions laid down by potential buyers.
There are those who believe that the question of the nationality of bank capital is basically secondary. Others fear that to overlook the issue would ultimately aggravate what Paul Krugman has called the ‘mezzogiornification’ of the peripheral countries of the eurozone.
The debate is open, but we should perhaps agree on one point. If the ECB decides to go along with a “Darwinian” uncoordinated European bank restructuring, the peripheral countries in greatest difficulty would be faced with a terrible dilemma: passively yield to the restructuring and control of their banks, or abandon the euro to retain the last word on the ownership of bank capital. Of course you can discuss what would be the lesser evil of the two options, and it would be good to start to do so without prejudice. But there should be no argument with the fact that the ECB, as its press statement made clear on Thursday, is pushing the peripheral countries of the Union to this point.
http://www.emilianobrancaccio.it 22.3.2013
Translation/edit by Revolting Europe
Watching Corporate Europe
For a given currency such as the Euro, either there is 1:1 parity between M0 (central bank money) and M1 (commercial bank money) or there isn’t. Actualy many problems would be mitigated if there was no guaranteed parity, i.e. if bank deposits could fall in value when monetary-financial bubbles burst. If in 2008 there had been a haircut on all bank deposits to write off bad debts, that would have been much preferable to austerity as a means of rebalancing. At least it would be so in substance – selling it to the public would have been a challenge.
However, parity or not parity has to be uniform across a currency. If Euro-denominated bank deposits in some Cypriot banks are overvalued and must be cut then all Euro-denominated deposits in the zone must be cut equally, by a smaller amount. That is necessary for a single currency and banking system to work. Otherwise, Cypriot bank money, or Greek, or whoever’s is next is not actually trading 1:1 with German bank money due to risk perception and we don’t really have a single currency. Or more accurately we have single M0 (central bank money and printed notes) but M1 (bank deposits and nearly all inter-bank payments) is already fragmented and exposed to de-facto exchange rate risk. That risk premium is opaque and thus much higher than if it were a properly floating national currency. Greek businesses, and presumably soon Cypriot ones, are unable to pay for imports with Greek-bank M1 (bank money) at parity. Businesses in countries with stricken bank systems are de-facto thrown out of the single currency already.
The Bundesbank hawks can’t have it both ways. Either the Euro is a single currency, which means a Euro in a bank in Cyprus is a Euro in a bank in Italy is a Euro in a bank in Germany so you can use it for payments, or it isn’t. That absolutely means that whetever happens to one Eurozone commercial bank in terms of crisis response has to be collectivized across the zone. Otherwise we don’t have the benefts of a single currency. We just have the penalties and there is no reason that electorates should accept such a flawed construction.
Posted by Pavlos | March 25, 2013, 6:55 pm