The island nation of Cyprus is hardly an important center of international finance or commerce, but events there could shake the foundation of the European Union. Cyprus has been in financial difficulties mostly because of its close relationship with Greece and the major problems besetting that country. About six months ago, Cyprus asked the EU for help dealing with its crisis. Well now that help has been offered and it comes with some very large strings attached. The Brussels bureaucrats will bail out Cyprus and its main banks provided that the country levies a new tax on deposits in all of the nations banks. There are two levels of taxation, but in general every person with a bank account in Cyprus will forfeit about ten percent of his or her deposits as part of this tax. Absent passage of the tax, there will be no EU money (supposedly) and the country's main banks will fail. To soften the blow of the tax, those who pay the tax will get stock in the mostly worthless banks as recompense.
This is an idiotic scheme that only a bureaucrat far removed from reality could like. Just think what it does. First, the tax penalizes those folks who have been prudent enough to save for their future needs. The folks who spend every penny and expect that the government will take care of them will not get hit at all. Second, businesses that might be operating close to the margin could easily go under. Losing ten percent of a company's bank deposits could be more than many businesses can endure. It won't be long until part of the Cyprus economy comes crashing down. Third, the tax is one that is completely unfair. It hits people wholly based upon the luck of the draw; those who happen to have assets in the bank get hit, but those who have equal assets invested in other places do not. Even those with bank accounts in banks located elsewhere are untouched. Fourth and most important, the new levy is a complete breach of faith with the people of the island. They were told repeatedly in the past that there would be no tax on bank deposits. Had the government done otherwise, the outflow from the banks would have been monumental. So the Cypriots feel that they were lied to, hardly a surprise. When the announcement came, there was an immediate run on all ATM machines which was so severe that these locations have now been shut. If the parliament approves this tax tomorrow (as demanded by the EU), there may be rioting. Even if things remain peaceful, there will surely be extraordinary anger directed at those in power.
But the problem does not stop in Cyprus. All over europe, people in countries with shaky economies have now seen the Brussels bureaucrats in action. They have seen the EU tell Cyprus that no bank account levy was needed only to then spring it on Cyprus over a weekend. How many Italians or Spaniards will take their money out of the local bank just in case the EU geniuses decide that try this move again? Sure, the Brussels crowd will tell Greece and Portugal and all the others that no tax on bank accounts will be needed, but what rational person would believe them. Remember the old saying: "Fool me once, shame on you. Fool me twice, shame on me." We are going to see a massive outflow of capital from the banks in the countries with shaky economies.
So, in dealing with the flea on the tail of the dog which is europe, the Brussels crew seems to infected the entire being. If I were Greek, I would be calling for withdrawal from the EU before the Brussels group decides that my country too needs a bank account levy. If I were German, I would watch this in horror as the supposedly intelligent bureaucracy in Brussels sows the seeds of the destruction of the EU. Even the British cannot feel secure. True, they were smart enough to stay out of the euro zone and to keep the pound as their currency. Nevertheless, a collapse of the EU will do great harm to the economy of the UK. And let's not forget, problems in europe will hurt America as well.
For the recent past, the mantra coming from the Democrats in Washington including the president is that America should model itself more on the example of europe. All I can say now is "REALLY????"
This is an idiotic scheme that only a bureaucrat far removed from reality could like. Just think what it does. First, the tax penalizes those folks who have been prudent enough to save for their future needs. The folks who spend every penny and expect that the government will take care of them will not get hit at all. Second, businesses that might be operating close to the margin could easily go under. Losing ten percent of a company's bank deposits could be more than many businesses can endure. It won't be long until part of the Cyprus economy comes crashing down. Third, the tax is one that is completely unfair. It hits people wholly based upon the luck of the draw; those who happen to have assets in the bank get hit, but those who have equal assets invested in other places do not. Even those with bank accounts in banks located elsewhere are untouched. Fourth and most important, the new levy is a complete breach of faith with the people of the island. They were told repeatedly in the past that there would be no tax on bank deposits. Had the government done otherwise, the outflow from the banks would have been monumental. So the Cypriots feel that they were lied to, hardly a surprise. When the announcement came, there was an immediate run on all ATM machines which was so severe that these locations have now been shut. If the parliament approves this tax tomorrow (as demanded by the EU), there may be rioting. Even if things remain peaceful, there will surely be extraordinary anger directed at those in power.
But the problem does not stop in Cyprus. All over europe, people in countries with shaky economies have now seen the Brussels bureaucrats in action. They have seen the EU tell Cyprus that no bank account levy was needed only to then spring it on Cyprus over a weekend. How many Italians or Spaniards will take their money out of the local bank just in case the EU geniuses decide that try this move again? Sure, the Brussels crowd will tell Greece and Portugal and all the others that no tax on bank accounts will be needed, but what rational person would believe them. Remember the old saying: "Fool me once, shame on you. Fool me twice, shame on me." We are going to see a massive outflow of capital from the banks in the countries with shaky economies.
So, in dealing with the flea on the tail of the dog which is europe, the Brussels crew seems to infected the entire being. If I were Greek, I would be calling for withdrawal from the EU before the Brussels group decides that my country too needs a bank account levy. If I were German, I would watch this in horror as the supposedly intelligent bureaucracy in Brussels sows the seeds of the destruction of the EU. Even the British cannot feel secure. True, they were smart enough to stay out of the euro zone and to keep the pound as their currency. Nevertheless, a collapse of the EU will do great harm to the economy of the UK. And let's not forget, problems in europe will hurt America as well.
For the recent past, the mantra coming from the Democrats in Washington including the president is that America should model itself more on the example of europe. All I can say now is "REALLY????"
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