Economic Ruin of the Troika Visits Cyprus

Cyprus recently experienced the most dramatic collapse since the beginning of the Eurozone crisis, which continues to deepen three years after it began. Only a few weeks after the island’s presidential elections were decisively won by centre-right leader Nicos Anatasiades, the country is enduring nothing less than an economic siege. Banks were shuttered, cash withdrawals limited and a modern economy reduced to a cash exchange. The latest developments have shown that any hope in European economic policy no longer fixated on principles of austerity and depression continues to evaporate.

Much like other countries which have received bailouts from the Eurogroup e.g. Portugal, Greece and Ireland, the situation in Cyprus shows that those responsible can be found both abroad and at home. Cypriot President Anatasiades originally agreed to a deal with a Europe that included an obligatory levy of small depositors. Creditor-states led by Germany ambushed Cyprus to attempt to negotiate this deal. Looking ahead to German elections in the autumn, the German government insisted that Cyprus should finance nearly half the bailout by raiding its own citizen’s bank deposits; a surreal situation where German domestic politics imposed itself on Cypriot society. The deal guaranteed that the Troika would deliver 10 billion Euros as long as Cyprus delivered the other 5.8 billion Euros – unprecedented conditions for such a bailout. This condition was imposed long before the usual conditions of austerity measures similar to ones imposed on Greece, Portugal, and Ireland were added to the agreement.

The plan was blocked by the Cypriot parliament. President Anatasiades then instructed his finance minister to try to pursue a deal with Russia that would never materialise, before finally going back to the Troika and agreeing a deal that eventually left small depositors untouched but which ultimately pulverised the banking sector, inflicting huge amounts of collateral damage to the “real economy”.

More than any previous bailouts, even those seen in Greece, the Cypriot one has the least chance of succeeding in stabilising the financial crisis. Previous bailouts across Europe have at least succeeded in temporarily calming markets until they awoke to the economic, social and political reality of the situation. The Cypriot bailout, on the other hand, has caused so much damage up front that failure is both inevitable and imminent.

Banks remained closed for around two weeks, paralysing Cypriot commerce. Economic forecasts are dire as a result of the turmoil. Unemployment may double from an already high 14% to a socially explosive 30%, and analysts predict that the economy will contract by more than 10% – even higher levels than the savage economic contractions witnessed in Greece. All of this will inevitably play havoc with the country’s deficit and national debt, with tax revenue collapsing as taxpayers lose their jobs or see wages cut. Out of fear of spending more than 10 billion euros on a bailout, the Troika may have just ensured that the Cypriot economy will not be able to pay back the amount loaned to it.

The Cyprus debacle demonstrates how Europe, as an entity, is still unable to function. The continent is trapped between two impossibilities. Politicians in the bailed out countries are terrified of adding an uncontrolled eurozone exit on top of the economic depressions they already endure. At the same time, both creditor and debtor states baulk at ripping up the sovereignty of European nation-states in order to build the common, authentic European institutions necessary for monetary union. Unable to go forward and unable to revert to the old mode of individual currencies, the continent simply sinks, with nation-state rivalries intensifying all the way to the bottom.

The bitterness toward Germany is only going to grow deeper, spreading far beyond Greece. We’ve already seen the ripples caused by the Cypriot bailout: a protester in Cyprus scaled the German embassy and took down the German flag; Spanish newspaper El Pais published and then retracted an article by an economist comparing Merkel to Hitler; and the Luxembourg foreign minister accused Germany of striving for hegemony in Europe. It’s impossible not to feel deep unease for the continent as it continues to evoke darker chapters of its history. The crisis has shattered the promise of prosperity in Europe, and with the misery set to continue and deepen, the promise of peace looks increasingly lost as well.

By David Ferreira (@Igualitarista)