STAFF NEWS & ANALYSIS
Was the EU Right About Cyprus?
By Staff News & Analysis - March 19, 2013

Why the EU is right on Cyprus … Cyprus's population is about three times that of Iceland. But once the panic about their bank deposits subsides, Cypriots might take a closer look at what actually caused the crisis, just as the Icelanders have been doing. For the big question that Cypriots still need to ask themselves is why, despite attracting tens of billions of euros from Russians and others, an amount that easily exceeds the GDP of the island, Cyprus banks are in such a mess that they have almost brought down the whole country. Maybe the lesson is that being an offshore banking haven just isn't worth it. And if that's indeed the case, the EU policy that led to that realization will have been more than salutary. – Reuters opinion

Dominant Social Theme: The EU must succeed and the people must pay.

Free-Market News: Here's a novel approach to the Cyprus situation courtesy of those contrarian thinkers at Reuters. This editorialist's work has appeared regularly at The Wall Street Journal and Time magazine, and he has decided that the European Union was right about demanding that Cyprus garnish up to ten percent of the bank accounts of those holding money in Cyprus accounts.

Of course, we learn today that the Cyprus parliament is not apt to approve the deal – though knowing how much pressure Eurocrats can bring on a country, it is quite possible that some sort of deal will be struck. But the idea that EU officials are RIGHT to take up to 10 percent of savers' accounts is a stupefying one.

For one thing, it again reverses the reality of the modern demos. This proclaimed reality is that the state serves its citizens not the other way round. This presumption – backed by all modern Western politicians – is looming as a bigger and bigger deal in the 21st century.

Basically, what's happened is that the Internet has made people far more savvy consumers of information and a lot of what was passed for democratic dogma in the 20th century simply isn't being accepted in the 21st. This is a big problem because the legitimacy of government depends on the citizenry acknowledging the fairness of the regimes in which they participate.

What is going on in both the EU and the US is that public rhetoric is departing more and more from perceived reality. When rhetoric collides with reality, people react angrily and faith in abiding sociopolitical and economic institutions is shaken.

This Reuters article, in our view, simply doesn't accept this fundamental conundrum. The author wants to make a case for EU righteousness but he doesn't realize that it likely doesn't matter. What DOES matter is perception. And people perceive the Cyprus solution as a wrong one.

It will haunt the EU for a long time, in our humble view. Again, the Eurocrats have miscalculated. They simply are incapable of understanding that their state must function within the context of the 21st century and not the 20th. The Reuters columnist doesn't seem to understand this, either. Here's more:

There are two compelling reasons why the EU actually has gotten this one right. The first is that Cyprus for years ranked highly on international lists of opaque tax havens, as it reinvented itself in the 1990s as the offshore banking center of choice for Russians. Under growing international pressure, and in order to join the EU in 2004, Cyprus eventually abolished its offshore tax regime and put in place a residence-based one with some clear oversight. Still, the suspicions about Cypriot banks linger on.

Cyprus remains on an Organization for Economic Cooperation and Development "gray" list of countries that have made progress to meeting international standards but have not yet been judged squeaky-clean. (So, too, does Luxembourg, which was the one country supporting Cyprus's objections in the weekend negotiations). Under these circumstances, simply cutting Cyprus a check for the equivalent of more than half its annual gross domestic product with no strings attached would be politically incoherent.

France and Germany for years have railed about the dangers of offshore tax centers, and have pushed their colleagues around the world at G8, G20 and other meetings to clamp down on abuses and harmful tax competition.

The notion of "moral hazard" was much bandied about during the 2007-08 financial crisis, although in the end few were punished. But not to ask for a contribution from the Cypriots themselves would undermine their tough line on tax havens and what the French and German leaders have called the need for a "moralization" of finance. Indeed, by suddenly showing that even preferred tax havens aren't 100 percent safe, the EU may have done a great service to international finance as a whole.

The second reason to support the EU bailout is more about economic pain than moral obligation. If you asked the Irish, the Spanish or the Greeks in 2008 whether they would have preferred a very sharp, one-time hit to their pocketbooks to deal with their national banking crises, or, as in fact happened, five years of intense economic pain, with soaring unemployment, rising taxes, cutbacks in social welfare and general impoverishment, the answer may be ambiguous. It's not a choice anyone likes making, and the Cypriots, of course, aren't being given a choice.

Let's take these reasons one at a time. The first reason the EU is "right" is because the attack on Cyprus savers will hinder its operation as a tax haven. But we see no substantive reason why France and Germany are in the right on this issue.

States will literally spend themselves to death. The idea that the world ought to operate in a completely transparent fashion is a fine one hypothetically but in reality power corrupts … and absolute power corrupts absolutely. We're not advocating that one cheat on one's taxes but the constant attacks launched by the West's top powers around the world aimed at collecting more taxes is detrimental not just to the countries being attacked but to Western powers as well.

Taxation has two major problems. First, it creates a government constituency that feeds on itself and demands higher taxes simply for the sake of funding the bureaucracy that enforces collection. Second, taxation rarely if ever does what it is supposed to do. Either governments build too many useless projects – ones that are unsustainable – or the money is simply wasted and ironically ends up in overseas tax havens controlled by bureaucrats collecting the taxes!

The second problem with taxation is that it is conducted via force. The higher taxes are, the more the relationship between the state and its citizens is fraught. When taxes are low, the amount of force necessary for collection is minimal but as taxes rise, the state becomes more intrusive and threatening.

We are starting to see a good deal of pushback throughout the Western world to the regnant state. It is obvious to us that the issue is being forced by Money Power itself and the globalists that want to create first social chaos and then an increasingly internationalized government.

But, again, this is not the 20th century and what people might tolerate out of ignorance a few decades ago is perhaps insupportable today. This can be seen in the diminishment of the elite's dominant social themes and their wider believability.

After Thoughts

In the case of Cyprus, Eurocrats apparently want to destabilize the island as a tax haven. They may end up destabilizing Europe.

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