20 March 2013

Why Cyprus matters

Here's a quick run-down for Americans baffled by the last few days' flurry of news from Cyprus.

Cyprus, a small member state of the European Union, is the latest country driven to the brink of economic collapse by austerity policies and thus forced to go hat in hand to the EU for a bail-out.  The EU has always imposed harsh conditions on member countries to which it gives such aid (usually including even more austerity which drives the country even deeper into economic contraction and rising deficits), but its demands on Cyprus included something even more dire -- a tax on bank accounts at 9.9% on balances over €100,000 and 6.75% on smaller balances.  Depending on how much you had in the bank, up to a tenth of it could simply vanish from your account.  The banks were duly closed to prevent account holders from getting their money out, while the Cypriot Parliament voted on the deal.

The first deviation from the normal script came yesterday, when the Parliament -- likely spurred by enraged demonstrations filling the streets of Cyprus -- rejected the deal with 36 no votes, 19 abstentions, and zero in favor.  The EU has rarely been defied this way, but when it does happen, it has ways of beating down the maverick state -- withhold any aid until it knuckles under, and in extreme cases even replace its leader with someone more compliant.  Since the EU is the only source of aid to rescue economies which its own policies have ruined, the stricken country has little room to maneuver.

But in Cyprus, that condition may not hold.  Cypriot banks are a favored place for wealthy Russians to park their money, and they have at least €20 billion there, meaning that the roughly 10% expropriation would cost Russian citizens at least €2 billion.  Russia's government has been vigorously denouncing the plan -- and as the Parliament voted it down, Cypriot President Nicos Anastasiades was on the phone with Putin discussing the matter, while his Finance Minister flew to Moscow (see report here).

What's going on?  Rumors abound that Russia might offer Cyprus a better bail-out deal, or that the giant Russian oil company Gazprom might provide aid in exchange for natural-gas exploration rights.  The EU is clearly alarmed at these developments, with German Chancellor Angela Merkel personally warning Anastasiades not to negotiate with anyone but the EU.  But the talks in Moscow continue.  Some members of the Cypriot Parliament are even talking about abandoning the euro currency, which would signal a real breach with the EU.  If Cyprus does transfer its alignment from the EU to Russia, it has much to offer -- there are even rumors of Russia gaining use of a naval base there.

As for the EU, the observation I've made before still holds -- if one country breaks away, the whole unwieldy agglomeration of disparate nations could start to break up.  And the escalation of its bullying of tiny Cyprus into an open clash with the eastern Colossus has added a new wrinkle to the situation.  If Russia finds that it can expand its sphere of economic and military influence at the cost of a few billion in loans to countries ruined by EU austerity-mania, it may not limit its ambitions to Cyprus (Greeks are watching Cyprus closely and applauding its defiance).  The grandees of Brussels are leading their fake superpower into a fight with a real one, and may soon find themselves on the receiving end of the kind of contemptuous slap-down they've been accustomed to dealing out to others.

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