The financial media is totally up in arms about Cyprus.
“The Europeans are utterly clueless!”
“You don’t cut deposits! You don’t mess with the sanctity of money!”
“Just when confidence had returned, European policymakers demonstrate the height of incompetence…for the 53rd time!”
Here’s the problem with all this screaming: I am SURE all the policymakers involved knew this was a CALAMITOUS decision. The ECB, the European finance ministers, the IMF, even the pedestrian Cypriot bankers – they have been in the middle of this mess for years now. To think that they didn’t realize that their action to haircut normal bank deposits would cause widespread panic and potential contagion is to oversimplify the region’s problems, all in the name of making yourself sound smart.
I’m not defending the Troika, or European policymakers more generally. I agree with about 5% of their decisions. But let’s not kid ourselves, the reason the European crisis is never-ending is because of the magnitude of the problems, which have built up over years and decades. The European debt crisis would not suddenly end because Merkel said X, Draghi said Y, or Lagarde said Z. It would not end simply by ending austerity. It would not end by the ECB insuring all bank deposits. It would not end by Greece and Cyprus exiting the Euro zone.
The European debt crisis is a crisis because it’s the culmination of 20 years of unproductive, ill-advised, debt-financed investment and consumption. It’s the culmination of 20 years of structural imbalances caused by a misleading convergence in interest rates in a poorly-conceived common currency community. It’s the culmination of 20 years of meager banking oversight by more than a dozen national banking regulators, allowing European banks to amass leverage ratios of 30 and 40 to 1. It’s the CULMINATION.
So when I hear the armchair pundits get up in arms about the latest European fix, my main thought is – it’s TOO LATE. The pundits should have been up in arms when the stresses were building, when the water level was rising, before the levees broke. At this juncture, the levees overflowed long ago. Mitigating the damage is an important job, but it’s just that – mitigation. There is no special ilixir that will cure the ills now. The damage will be shared, and shared widely.
I can hear objections to my rant above already:
“That’s the whole point – the damage should not be shared by depositors, but by others.” My point is, whatever the policy you choose, the entire society will be hit, and hit hard. There is no easy fix. There are dozens of parties involved, fighting to protect their own interests. And if you were in charge, instead of the doofus European policymakers you so easily criticize, I doubt you would be able to juggle that fight much better. But of course, you’d like to think that you could.
There is an important, more general lesson here. As much as economists, politicians, and public policy experts like to point out that markets are “fickle”, their general focus on crisis-fighting only after a crisis has appeared is the height of fickleness. Human nature, though, is naturally wired for short-term thinking, the generations to come be damned. Far-sighted policymaking is likely an oxymoron as a result. But a man can always dream. Or delude.