I have been following the Cyprus crisis quite closely, not least because, many years ago, I used to live there. Many commentators are opining that the whole thing is a disaster and that the EU has handled it badly. I disagree. I am much more in agreement with Peter Gumbel who points out that a short sharp shock is probably better than a long slow one and also highlights the fact that off-shore tax havens are a source of economic and political weakness to everybody. Gumbel writes, "by suddenly showing that even preferred tax havens aren’t 100 percent safe, the EU may have done a great service to international finance as a whole". The hit for wealthy people who hid their fortunes in Cyprus will have been massive in this case and this is important. As long as it is possible for the wealthy to simply move their money off-shore, serious wealth redistribution remains impossible everywhere. The EU was, therefore, absolutely right to deal decisively with the Cyprus problem. To have such a haven inside the EU would undermine the whole European project by introducing a laxity into fiscal affairs that would be a worst case of the disease that has brought the EU to its present crisis. Present measures do, however, make clear that the EU is dealing with this disease in an effective way.
When historians look back on this period they will not be listening to the outraged voices of contemporary commentators. They will see, rather, how the advent and advance of the banking union will have been a key turning point in the history of the continent. The EU struggles with the fact that financial policy has mostly been in the hands of national member governments and some of those governments have a long history of less than good practice. When the present crisis started everybody assumed that it had to be dealt with by direct negotiations between the EU and the national governments and in such a forum national governments generally had the upper hand so that it was impossible to bring in any serious reform. Greece and Ireland were dealt with in this way. Then came Spain and it was suddenly realised that banks and governments could be separated. The Spanish problem was more a bank problem than a government problem so the EU proposed that it deal directly with the banks and this quickly led to the realisation that there could be an effective banking union across Europe without needing new treaties between governments. The Spanish government also realised that it was less painful to let the "troika" (European Central Bank, International Monetary Fund and the EU itself) step in and impose terms on its banks (and take some of the blame for the immediate effect of higher unemployment) and this set the tone for future interventions.
The one big problem standing in the way of a banking union has been the heritage of bad practice from the past. Starting from scratch, an Europe wide banking union can mean that the ECB becomes the bank to the bankers and the EU becomes the body that sets standards and ensures good practice and this offers some real guarantee that people may have confidence in European banks in the future. However, something had to be done about the heritage of bad debts and shady practice from the past. The Cyprus instance has been by far the most decisive surgical intervention to deal with this problem and it gives a clear message that the bad old days are over and any remaining vestiges of the old ways will be dealt with severely. The EU used to be criticised for ineffectiveness, but here we see a quite different spirit at work with the EU implementing and carrying through a radical and vital reform at a pace that it is difficult to imagine any other large country achieving.
We are seeing here a reform that
1. deals effectively with corruption
2. eliminates large scale tax evasion
3. drastically restructures over-inflated institutions turning them into workable and effective enterprises
4. brings a common standard of regulation
5. forces persons in authority to act in a responsible manner
6. in effect, brings about a substantial centralisation of economic control within the euro zone.
All of this will, in the medium term, mean that the euro will emerge as a very strong currency, quite possibly displacing the dollar in many areas.
The fundamental reason for my optimism about all this is that crises of this kind are fundamentally ethical and the only way to clear up an ethical shambles is to act in a way that cuts through the mal-practice rather than appeasing it even though doing so always initially raises shreeks of protest. In the way that the Cyprus banks have been dealt with there will be no bail-out of rich investors or top bankers by the tax payer. In the earlier rescues, most notably in Ireland and to an extent in UK, it was the tax-payer who provided the funds for the rescue and everybody knew that this was not right, but nobody could think of another way of doing it that did not have even worse consequences. Now another way has been found. Rich investors who put their money in Cyprus banks will now see that money converted into equity. If the bank proves to be worth nothing that equity will become a loss to those rich people. Not a cent of tax-payer money will go into the pocket of the already rich. This is a great improvement on what happened in the past and it is in keeping with the supposed ethics of the capitalist system.
Some will argue that the capitalist system as a whole is unethical - I am not entering that debate here. However, every system does have its own ethic and if the capitalist system is what you have got then you have to deal with it in its own ethical terms. The ethiucs of capitalism are that the rich can get rich by taking risks. It is therefore essential that the risks be real ones. If you put your money into a failing enterpise you take the loss, you do not turn to the tax-payer and say, please bail me out.
When the dust settles I think we will see that the intervention in Cyprus will have significantly contributed to a higher standard of responsible governance in the whole financial sector of European affairs, not just on one island, but across the continent.