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So, there appears to be some worry that the deal will not go through as the administration can only firmly expect to get couple votes short of passage with the remainder hanging in the balance and majority of the people saying no in the latest polls. Enough worries to have the government decree an extraordinary bank holiday for Tuesday and postpone the vote until late Monday, which already means financial markets will open to no deal situation with euro pointing decidedly downwards already. My due condolences to those long Italian banks. And it also appears that Greece central bank might be the lender-of-last-resort for Cyprus banks for now, which is probably greatly appreciated by the body of people in Greece if the money never comes back and in fact goes into supporting deposit withdrawals by Russian clients with money of dubious origin. Don’t worry though, ad-hoc solutions, secrecy, layers upon layers of confusion and information suppression support genuine trust if you believe it hard enough.
European Union seems to be acting as a sort of an extortion racket here; they are forcing the hand of Cyprus’ parliament. The parliament cannot really say no for too long, because otherwise they will be blamed for what happens next. It was perhaps ingenious on the part of the EU to play their cards this way; by threatening to confiscate the deposits of everyone including deposits protected as of Friday by deposit insurance, the EU guaranteed that in any absence of a deal, people will still initiate a bank run large enough in size to make them scared enough to impose a bank holiday much like they will do even if EU backs down, effectively making the national parliament of Cyprus completely redundant. It is also a huge gamble and show of power, and altogether something governments should perhaps not be. ECB could of course keep the banking system liquid for the time being with emergency lending, but if the banks open on Wednesday or the next week with no deal, billions will disappear from the banks with foreign deposits then probably being in the safe, putting significantly more pressure on the remaining deposits at which point there will probably be more bulldozers parked at bank premises especially by those who took out sizable mortgages late last week. And Merkel does not want to see ECB cave in. A no vote here seems particularly unlikely, while a yes vote seems very close to being illegal and perhaps up for legal contest later, so perhaps we will see a TARP redux with plunging stocks turning a no into a yes against 100-to-1 public opposition. The conservative case though is ruthlessly effective; we know we did nothing to prevent this, but you must still do as we say, because the opposite is worse for you, and for simplicity we have reduced the choices to either yes or no. Most people become die hard conservatives the very second liberalism starts looking like something other than double rainbows.
It would have been easier had they decided to honor the deposit insurance they themselves hold so dear. Liberalism has always been an option: yesterday, today and tomorrow. Greece though seems to remind us constantly that the opposite has far more appeal for reasons I don’t quite understand. Furthermore, it does seem like there is not much understanding here about the function failure and bankruptcy serve in a free economy. Moreover, Cyprus has had nothing but time to enact a bank resolution framework based on law expanding bankruptcy laws for deposit taking institutions instead of having been forced into ad-hoc deals with the EU if they have indeed deemed liberalism a non-starter. Or they could just honor the deposit insurance and existing laws in place as of Friday but now in question for the sake of preserving the last vestiges of integrity the law still has. Depositors suffering losses instead of taxpayers in any country is the correct course of action, but not like this. In reality, Cyprus creditors should not be protected, bank creditors should not be protected, bank management should not be protected and existing failing structures should not be protected against new entrepreneurs. We have most certainly already thrown caution to the wind here in Europe with EFSF, ESM, OMT etc, but if this blows up in the next few days, the reason for it is supremely stupid; Merkel is trying to boost her election chances against a looming defeat in September over few billion euros when the entire transfer union apparatus has been against rules from day one. And she was reportedly seeking up to 40 percent haircuts on all deposits, which puts her support for the concept of property rights in serious question, and possibly reveals quite a bit about her desperation over the traction Alternative für Deutschland is gaining with support pegged at up to 25 per cent, even though I do not necessarily understand why would Germans be that upset with the euro as they are not really suffering here in economic terms at all. If they just wish for less authoritarian policy, then all is well.
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There is clearly an element of increasingly strong bond between sovereignty and solvency at play here; absence of the latter is being swiftly used to force concessions on the former and as a conduit towards further harmonization so that a unified and presumably nationalist Europe can be brought about. The same theme has manifested itself strongly in Greece and Italy and to some extent in Spain, Ireland and Portugal. This coercive relationship between the federal Europe and member states is nowhere to be found in the constitution except for the questionable stability pact and what is implied by the euro area arrangement with prohibition of monetary financing. Yet even that is clearly just a passive element, which member states should take into account, not something that empowers action by the EU to far exceed its powers and start decreeing tax regime changes etc. The EU constitution clearly does not give much power over taxation to the federal government even though few measures have been put forth, but it does seem like these elements are being introduced even in somewhat more overt fashion than elaborated by the French diplomat Jean Monnet. It is interesting, however, how the lapses of the stability pact and its supposed enforcement mechanism have gradually transformed into this Troika driven instrument that was not envisioned or included in the treaties but that is nonetheless today the most notable instrument affecting relations between the federal state and the member states in the European Union or euro area specifically, even far more so than CAP, free trade area or the Court of Justice for example.
Just as a point of curiosity, when was the last time the federal government attempted to interfere this strongly in the affairs of one or more of the Several States in the US?
This could also have some really interesting ramifications to Italy’s political situation/gridlock and Grillo’s rhetoric, something Germany definitely was not looking for.
Somewhere Bastiat must be spinning in his grave.