Everyone knows that the banking crisis in Cyprus originated in Greece. If the Greek economy had not collapsed nobody would have complained about Cyprus.
When the decision for the Greek PSI (Private Sector Involvement) was taken the Europeans had not realised the repercussions for Cyprus would be huge. This decision resulted in losses of around 5 billion Euro for the banks, which was practically all of their capital base.
Furthermore , the collapse of the Greek economy meant that loans worth around €26 billion, extended by Cypriot banks to Greek businesses, had to be written off, so hiking their recapitalisation needs. So from one day to the next you were faced with a banking sector that was practically bankrupt.
Also, in the last stages before the Eurogroup decision, the € 16-17 billion that Cyprus had initially requested was suddenly limited to only € 10 billion, citing debt sustainability issues whilst completely disregarding the future prospects for the Cypriot economy, including the recently discovered gas reserves.
So, in the case of Cyprus, when Europeans realised they could not impose a ‘haircut’ on Cypriot government bonds on account of debt sustainability issues, as they are held mainly by Cypriots, they resorted to a deposit holders haircut. This was the first time such a measure was implemented in the history of the European Union.
The message this has sent around the world is to not trust banks in the south, only banks in the north.
In other words, if a bank in southern Europe like Portugal, Spain, Greece or Cyprus is well-run, then it has to suffer. If a bank is not well run but is in the north, then it’s OK.
First of all, let me point out that there is no question about Cyprus not being in the Eurozone. Cyprus is in the Eurozone and will prove to its friends that it will be a small but valuable member of the European Union.
Secondly, I am dead against a Eurozone exit or a break-up of the bloc. Devaluation has been used in many countries and has failed. You can only become more competitive by increasing your productivity through the use of better technologies etc, rather than by devaluing your currency. If any of the peripheral economies exit the Eurozone, they will become even more uncompetitive, and the Eurozone will disappear. That will certainly not be to the benefit of the rest of the world.
Having said that, the policy measures that Cyprus needs to implement need to focus on the two legs it stands upon: the tourism and business services sectors.
On tourism there is broad agreement on what needs to be done to grow the sector.
On the business services sector we need to do more work. First of all, it’s been a month since the Eurogroup decision was taken and capital controls are still in place. It made sense to enforce these controls at the onset of the crisis, but they should be relaxed immediately, as the longer you keep them in place, the more you ensure that troubles emerge once you relax the controls.
Secondly, we also have one of the highest proportion of graduates in Europe, so we need to put in place specific measures to attract industries specialising in areas like IT development, in the manufacturing of generic medical products and so forth to make best use of our graduates.
And, finally, we need to make sure that everything that is in the Memorandum is speedily implemented. I don’t think that there is any other country in Europe that has acted as swiftly as Cyprus in passing the related legislation through parliament.
In the aftermath of the two World Wars, the dream of the European founding fathers was to avoid conflict and war. Their dream was that Europe had to be united and that’s when the European Union became a reality.
In the current globalised world, if there is no European Union, there is no Europe.
A movement towards a closer European Union is absolutely necessary if we want to avoid a future crisis. This is why the Europeans established the Eurozone and the Euro hoping that this would be the beginning.
But, as you know, you cannot have monetary union without fiscal union . And while everybody was happy to have the same currency in the past, they didn’t want to adjust their domestic policies and borrowing practices up until the crisis started developing.
So in my opinion, if we want to overcome the crisis we need to move in the quickest possible way to a closer European Union. If we don’t do that we are going backwards. We cannot stay stagnant. Either you move forward or you move backwards. You can stand still for some time, but not forever.
In a recent article, Professor Timothy Gordon Ash pointed out the old phrase used after Italian unification that ‘we now have Italy, what we need is to make Italians”. Now we have Europe and we need to make Europeans.
In our interview with the former President, we also asked him on his opinion about the three-speed economy, and in particular about the prospects and the challenges emerging economies pose to businesses around the world.