[Marxism] A new phase in the crisis of the euro

Juan Andres Gallardo juanagallardo at gmail.com
Tue Apr 9 19:13:25 MDT 2013


World economy
A new phase in the crisis of the euro

by : Juan Chingo
Sunday 24 March 2013

Thursday, March 21, 2013

The decision of the European Union (EU) and the Cypriot government to
confiscate part of the deposits of small savers indicates a stepping up by
the creditor countries to avoid, at all costs, the devaluation of the
mountain of debt (an explosion of “fictitious capital”) that has been
accumulated. In their turn, the resistance encountered among the Cypriot
parliamentarians to the dictates of the EU, influenced by the interests of
the Russian oligarchs who have a strong influence on the island, is opening
up the possibility of a default and a possible exit of Cyprus from the
Eurozone. Ironically, one of smallest countries in Europe, with a
population of just over a million, and with an economy that represents only
0.2% of the GDP of the EU, could turn into a new turning point in the
crisis of the Eurozone.

*A freeze on bank accounts in the middle of the European Union*

In the early morning of Saturday, March 16, the EU Ministers of Economy and
Finance agreed to provide a 10 billion euro loan to Cyprus, so that the
country could rescue its banking system. In exchange, the conservative
government was forced to establish a 6.75% tax on deposits of up to 100,000
euros and a 9.9% tax on deposits above that amount. By this measure, the
Cypriot state hoped to collect 5.8 billion euros. To avoid the massive
flight of depositors, the banks have, since that day, withheld that amount,
and transfers have been limited, in order to prevent a massive withdrawal
of funds. The banks will remain closed until Thursday, March 21, or even
until the next Tuesday (imposing limits when they open is even being
considered), to avoid a massive run of savers to withdraw their deposits.
That is, a freeze on bank accounts, like that which the then Minister of
Economy Cavallo in Argentina used in the 2001 crisis.

In the face of the fury that the unexpected decision produced among the
population, the inability of the Cypriot government to achieve
parliamentary approval of the measures and the damage done to confidence in
the European banking system, especially in the countries of the periphery,
European authorities sought to back away from the methods of their

However, the damage was already done. Confidence in the banking system of
the countries most affected by the crisis was maintained in part by the
‘back door’ bailouts that the European Central Bank (ECB) used, but,
especially among the population, in the belief that deposits less than
100,000 euros were protected. When this guarantee, that was given in 2008,
after the collapse of Lehman Brothers, was called into question, the risk
of a flight of deposits increased.

But, in their attempt to ‘rob Peter to pay Paul’, the disagreements of the
European leaders have not stopped. After the unrest produced by the measure
both inside and outside of Cyprus, these leaders urged the Cypriot
government to raise the fee on deposits above 100,000 euros, so as not to
harm small savers. Concretely, they proposed a fee of 15.6% for this type
of deposit. However, Nicosia (the capital of Cyprus) appeared opposed to
accepting this measure, because it is afraid that it could scare away
foreign investors, mainly Russians, and harm the country’s business model,
based on its banks (as well as tourism and the real estate business,
connected to the same wealthy groups). The Parliamentary vote on March 19
which rejected the tax on private deposits proposed by the Eurogroup,
despite the fact that the government had presented a toned-down version
that left savings of less than 20,000 euros exempt, took the leaders of the
EU by surprise. All the parties voted against the draft of the law, with
the exception of the governing DISY, that abstained.

*Germany’s new, tougher, policy encounters strong resistance*

>From the beginning, Germany entered the negotiations with a radical
position, demanding a big blow against the depositors. With the elections
in sight, the German government does not want to look like it alone is
paying the bill, to avoid the contagion. This could be a big turning point
for the crisis of the Eurozone. The fact that Germany is no longer willing
to provide bailouts at any price marks a big change in the crisis. In other
words, through Cyprus, the German government could be sending a harsh
message to Italy and Spain, which are beset with serious political and
economic problems: Italy with the impossibility of forming a government and
Spain with the executive hounded by the scandals of corruption. Is German
approval for other countries to access the European Stability Mechanism
(ESM), with its fund of 800 billion euros and to the ECB’s Direct Monetary
Transfers mechanism, at risk from now on? It could be that Cyprus is
sufficiently small to be a special case, but, from now on, this is not a
sure thing.

However, the result of this harshness from Berlin – which works in tandem
with the ECB, that threatened to withdraw liquidity from the completely
insolvent banks of Cyprus if they do not carry out a proposal on the terms
that Europe wants – still remains to be seen. To the resistance of the
small savers are also added the interests of the Cypriot political caste
who are beholden to Russian investors. Nicosia’s rejection of the demands
and the appeal to Moscow to find a way of alternative financing have
dramatically increased the financial risk for the island. If the Cypriot
authorities cannot collect additional funds in a way that satisfies the
Eurozone authorities (Russian money, but not in the form of a loan that
would increase sovereign debt to unsustainable levels, precisely what the
first plan tried to avoid), they could find themselves forced to break the
agreement proposed by the Troika and seek a bigger deal with Russia. On the
other hand, if this fails, the island confronts the risk of a complete
banking and economic collapse, and the possible exit from the Eurozone,
with repercussions that could be felt throughout the EU.

As of now, the result of this struggle is totally uncertain, and all the
choices enumerated are possible. For the moment, the Cypriot ‘no’ has had
repercussions throughout Greece. As some commentators are saying, it could
have inspired the Greeks to think that there is ‘another way’, that would
make them question why their own government accepted the terms of the
bailout so readily.

*Are we heading towards a crisis in Germany’s relations with Russia?*

The preceding shows that the measures adopted on this small island could
have big geopolitical consequences. Historically, Cyprus, both in the final
years of the former Soviet Union and then with Russia, was the destination
of investment, whether for the government, the political elite, the
businessmen or money laundering. Even during the West’s blockade of the
former USSR, this island was one of the first to open its banking system to
Moscow, as a reward for Moscow’s support in the Turkish-Cypriot disputes of
the years 1960-1970.

When the current crisis in Cyprus began, Russia proposed rescuing the banks
in 2008 and 2011, having the backing of the previous government of Cyprus
(that was communist) to relax pressure from the EU, a solution that Germany
objected to. In this context, most recently, Putin brought up his intention
to help Cyprus, but as part of a plan of the EU and Russia, favouring his
alliance with Germany. In turn, and because of domestic reasons, Russia has
not sought to rescue Cyprus, in line with the current campaign against
corruption that includes the repatriation of offshore accounts abroad to
Russia, where the financial sector is now relatively more stable.

However, now that the plan is directly affecting Russian interests, the
Moscow government has come out to denounce the plan. This could put Putin
on a collision course with Germany (and other EU countries): by seeking his
own solution to protect Russian interests in Cyprus (a Gazprombank
investment), a measure that would not involve a direct bailout, Putin would
be going against the German line. It is not excluded either that pressure
from Germany on Cyprus will end up pushing the Cypriot government to
strengthen its ties with Russia. This could be realized through some type
of financial agreement between Cyprus and Russia that would permit Cyprus
to reduce the pressure from the Troika, and Russia to increase its control
over the island banking system and exploit its gas reserves (which would be
very important for the Russian giant Gazprom, in decline in the European
market). The possibility that Russia could open a naval base on this
strategic Mediterranean island cannot be ruled out. The decisions that are
going to be reached by Cyprus and its President, Nicos Anastasiades, in the
coming days and weeks go far beyond the question of who is going to pay the
bill. This new situation, of a possible Russian geopolitical advance on an
island that was historically a pawn of the United Kingdom against Moscow,
could increase the already existing tensions between Russia and the EU:
Russia’s relations with Great Britain and France have already deteriorated
because of Russia’s weapons shipment to Syria and its support for Assad.
The bailout of Cyprus could damage relations with Germany, Russia’s most
important European partner.

*For the expropriation of the private banks and the nationalization of the
credit system!*

The crisis of the Eurozone shows that, in order to save the big private
banks, the creditor states do not hesitate to use the most radical
measures, in favour of their interests. Deflationary policies, otherwise
know as austerity, seek in an increasingly arbitrary and violent way to
guarantee drawing rights over the surplus value of businesses which are no
longer profitable but for which the capitalists refuse to accept losses.

As in Greece, where workers paid for the restructuring of sovereign debt,
so in Cyprus small and medium savers are the ones who must make the
sacrifices in order to pay for the socialization of the losses on deals
that they did not make. In Cyprus, while the Russians are being forced to
pay part of the bill, the big European banks and investors that unwisely
made loans to the Cypriot banks are being rescued.

The fact that Cypriot bank deposits were not guaranteed shows that legal
security is sacrosanct for creditors but not for savers. If the same thing
is repeated in other, larger EU countries the political and social
implications could be explosive. As the Financial Times analyst Wolfgang
Münchau said on March 18, 2013, “If it was desired to feed the political
climate of insurrection in southern Europe, this was the way to do it.”

For that reason, faced with the increasing threat of individual savings
accounts being seized to provide more capital for the banks, there is only
one progressive solution: the expropriation of the private banks and the
nationalization of the credit system. This solution “does not mean in any
case the expropriation of small bank deposits. On the contrary, for small
depositors, the sole state bank will be able to create more favourable
conditions than private banks. In the same way, only the state bank will be
able to establish for the peasants, the artisans, and small businessmen,
conditions of privileged, that is, cheap, credit” (Leon Trotsky,
Transitional Programme). Giving the fact that the capitalist state and its
parties will always seek to save the big capitalists, we must impose a
fundamental solution: the central resources of the economy must serve the
vital interests of the workers and of all the other labourers. This can
only be guaranteed if state power itself passes from the hands of the
exploiters into the hands of the workers.

March 20, 2013

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