March 27, 2013 Leave a comment
It’s amazing how little coverage the banking situation in Cyprus is getting here in the United States. Banks aren’t open for the second week in that country as pols and the EU debate how much money the EU is going to take out of savings accounts in Cyprus. The latest deal has only the “rich” seeing their money confiscated via a wealth tax. Even so, it isn’t preventing the legitimate fear of a massive bank run when and if banks reopen. Considering they wanted to initially tax the wealth of everyone in Cyprus, it should hardly come as a surprise that middle and lower class folks in that country don’t trust the banks, their government or the EU any longer.
It’s easy to dismiss Cyprus as an irrelevant little country that doesn’t affect us in anyway. It’s also easy to dismiss those who will lose money as a bunch of Russian oligarchs, as a good portion of the money to be taken out of accounts belongs to such people. It isn’t quite as easy to dismiss countries like Italy and Spain who are being threatened with similar wealth taxes by the EU. All of this is to prop up failing banks, which will of course will do little more than push failure off to sometime in the future.
If you’re a middle class depositor in Spain or Italy, you must be looking at what’s happening in Cyprus with absolute horror. The EU, largely led by Germany, is essentially destroying the nation of Cyprus. Their original plan would have gutted the savings of the middle class. The mere threat of such a gutting is going to cause bank runs once the banks reopen. No one trusts their government or the EU. If you’re a middle class Italian, you’ve got to be thinking about removing your savings from Italian banks. One might suspect that these days the notoriously secretive Swiss banking industry is opening a lot of accounts for the citizens of Spain and Italy.
This matters for us here in the US because the Euro zone is one of our biggest trading partners. It’s becoming increasingly clear that the Euro isn’t a viable, continent wide currency. The fiscally responsible Germans are rightly tired of bailing out the fiscally irresponsible Mediterranean countries. There is a great divide in Europe between the north and the south. At what point does Germany simply cut loose the Mediterranean countries from the Euro and/or return to the deutsche mark? How smart does Britain look at this point for staying out of the Euro in the first place?
Our deposits in the US aren’t necessarily at risk of a massive wealth tax, though there is precedence for the government shutting down banks. We need not be overly concerned about Congress passing a wealth tax and taking away middle class savings. We’re being affected by what’s happening in Europe because the Cyprus situation is dragging down the Euro zone. Our government should not get involved in the internal affairs of Europe. We should however hope for a quick solution and perhaps a return to multiple European currencies. The EU’s actions in Cyprus are nothing short of a disaster if one wants to have stable banking. Hopefully the EU will have learned their lesson. The safe bet is that they probably haven’t.