This week’s defining news echoes Clinton’s electoral comment: it’s the economy, stupid.

The Cypriot Chaos Cash Panic, CCCP, has sown confusion in Europe. Triggered by a country that represents 0.2 % of the EU GDP.

You might argue that fifty dead bodies on the tenth anniversary of the US invasion of Iraq is a stronger headline, but the usual rules apply—it’s horrible, but it’s not here.

The president of the Central Bank of Cyprus, the wonderfully named Panicos Demetriades, is in charge of an empty shell. All the pundits are jumping up and down about the iniquities of Cyprus, a small island that derives its income from services: the main ones being tourism and offshore banking—it’s a favorite spot for Russian money, and popular also for parking dodgy British assets.

It’s pretty obvious that any tax haven with strong confidentiality laws will attract a certain type of client, and Cyprus is no different. A big slice of Cypriot bank deposits is of dubious provenance. That means at best cash subject to taxation in its country of origin, and at worst revenue from ‘hard’ crime,  such as arms, drugs or prostitution. In the middle, skimmed cash, payoffs from business concessions, you get the picture.

So there’s all this cash, but the banks are bankrupt? A large part of the problem comes from exposure to Greek sovereign debt. It seems much of that Mafia money purchased Greek bonds, and subsequently took a major haircut. So indirectly, the Cyprus problem is a circular outcome of the way Europe handled the whole issue of stability of the euro.

The EU left Greece twisting in the wind, the Blackberry kiddies swooped in, Greek debt soared, and in the subsequent write-down (i.e. any holding of Greek debt paper became worth fifteen percent less), the banks holding Greek debt took a bath. That’s the hot water Cyprus is in now.

Not hungry yet, but getting peckish. Europe escapes the red band of world hunger, but there are already a lot of hungry people in Europe.

Not hungry yet, but getting peckish. Europe escapes the red band of world hunger, but there are already a lot of hungry people in Europe.

The idea that you resolve this by taxing depositors, particularly small depositors, is the stupidest thing politicians have done in a long time. It’s a terrible sign of the times that ministerial heads are not rolling—not in Cyprus only, in Europe. And the pathetic game of ‘pass the (evil-smelling) parcel’ among Germany, Cyprus, the Eurogroup, European Commission, and the IMF stinks—much worse than the parcel itself.

Philip Coggan, in his wonderful book ‘Paper Promises’, writes

Money is the belief that someone will pay you back.

And the sheer stupidity of the EU decision is evident in the repercussions. As I write, Cypriot banks have been closed for a week, only cash can be used for transactions locally, and without credit, cash is rapidly running out.

Right now, my wallet contains only one ten euro bill. But also a couple of credit cards. I know what I can buy with my ten euros: one bottle of damn good wine, or two to three bottles of good stuff; ten newspapers; a meal in a cheap restaurant; less than two days transit on the Lisbon metro. If I use the national health service, I’ll get two consultations at my local health center, but I couldn’t afford the twenty euro fee at A&E.

I’m relatively tranquil as I write this, because I know I can tap into some credit to either secure more cash or use the banking support network, i.e. get what I need and pay them back later—in exchange for a small matter called interest. In desperation, I could use less fungible assets: I could sell my car to pay for my trip to A&E. Then again if the reason I went was because I wrote my car off in a road accident, I’d be in serious trouble.

The problem is, I can’t sell a bit of my car to solve an immediate cash crisis. I could get a loan against it, as long as the banks are lending.

One of the bizarre questions for the aborted Cyprus deposit tax is this: if depositors are taxed to prop up the banks, but the banks have no money, the tax is levied on something that doesn’t exist. Put another way, the banks are already so overextended they’re incapable of paying back their deposits, even without a bank rush, right now. The nominal ten billion bailout from the EU is then merely a cash injection so Cypriot banks can guarantee the deposits of Russian oligarchs (Abramovich, the owner of Chelsea F.C., runs his empire out of Cyprus). That would be after said oligarchs take a haircut.

In all this snafu, which for non-native speakers translates as ‘situation normal all fucked up’, Cyprus has been singled out because its banking system is huge with respect to the national economy. I can’t see the difference from Liechtenstein, Luxembourg, or Malta. Or all the Caribbean tax havens. But still…

If you expect a a run on the banks, do you want to piss off a few big guys, or a whole bunch of little people? So it was that the small depositors were bundled into the mix—screw the little guy to ease off on the heavy hitters. This weekend a law was passed imposing capital controls. Only a few days ago, finance minister Michael Sarris told CNBC capital controls were out of the question. No wonder all over Europe, from Ireland to Italy, small people are wondering who’s next. Suddenly, euros under the mattress seem extremely appealing.

I see a pattern here, the same images as Spain, Ireland, or Greece. And I see a path. The path leads down, and gets progressively steeper. It only has four steps. The more steps you take, the harder it is to come back up. All over Europe, we see the same path. North and south, eurozone or not. The only difference is the step we’re on.

The first step is financial. Unquestionably all Europe is down to that one. The next is economic. A good many countries have already taken that extra step.  The UK, France, Italy, Belgium… The next is social. All southern Europe took that one. Ireland too. Now you lengthen your stride, and worry a little about the kind of shoes on your feet. Because this is a longer step, and some way down. You can hear a noise below, it sounds like a running stream.

Cyprus has taken the political step, in a way as yet unseen in Europe. Out of an assembly of fifty-five members of parliament, not one voted for the deposit levy. Good for them. It’s the first parliament in Europe that shows balls during the euro crisis. Ovaries, of course, in the case of the ladies. In this case, eleven percent of the floor are ladies, and I wouldn’t add to their troubles by saddling them with a pair of testicles.

This whole austerity business (or lack of it) is a product of the German thought process, a nation that lost two world wars in the twentieth century. The reason Germany loses wars is they only change the plan when they’ve lost. They can’t understand that Europe is not Germany, and in many respects, Europeans believe Germany is not Europe. A bit like (bits of) Russia: it’s both within and without Europe.

Cyprus took the last step, the political step. When you land on that final stone, you realize the surface is uneven, and rather humid. You can plainly see the water now, a dark, swirling mass below. You get the feeling that a sudden gust of wind will push you off; your legs feel weak.

These are the steps Europe has taken many times in history, over the centuries—nine out of ten times, it’s ended in violence. Sometimes war: civil war, war between nations, but also war among nations. Once you fall in the water, the torrent takes you. One thing’s for sure—you’ll never climb up those steps again.

Atmos Fear and The India Road. Quick links for smartphones.

Atmos Fear and The India Road. Quick links for smartphones.


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