In the
Germany of the pre-hyperinflation era, the Reichsbank creed was a Mark is worth
Mark whether paper or gold, in Berlin or Munich. This creed was also enshrined
in the Euro when the new currency was adopted by the 17 European countries. To
make sure that that was the case one of the fundamental principles of the Euro
project was the free movement of capital
and goods.
This was
the case till last week when Cyprus was forced to liquidate one bank and break
up another. The Cypriot government passed a law giving powers to the governor
of the Bank of Cyprus Mr Panicos Demetriadis to stop the panic.
This is an
extremely worrying development and in my view completely against the interest
of the Euro-project and Cyprus. It is absolutely the wrong decision especially
now that Cyprus has yielded on the entire Troika demands to restructure and
clean their banking sector. Cyprus should refrain from imposing any capital
controls that create a Euro of different value in Cyprus from that of Germany.
A Euro is worth a Euro whether in Nicosia or Berlin. I am surprised that the ECB
accepted such a blatant violation of the fundamental principles of the EU.
The
Eurogroup made a gross mistake when it asked for insured deposits to be haircut
and the ECB bears a lot of responsibility in not refusing to accept such a
solution. The ECB should not make another mistake by accepting capital
controls.
The ECB’s
primary responsibility is price stability and financial stability. The Cypriot
banks following the Sunday’s decisions to convert depositor to equity would
have more than enough capital to be solvent. Any outflow of money would pose a
liquidity shortage in the Cypriot banks and not a solvency issue. The solvency
issue has been addressed.
Taking this
into account the ECB should extend their liquidity to Cyprus either through the
normal MRO or through the ELA of the bank of Cyprus. Any shortage of printed
notes can easily be fixed by borrowing from other central banks in the same way
the Bank of Greece borrowed tens of billions of printed notes from other banks.
This would
restore faith both in the Euro and in the Cypriot banking system. There may be
a spike in the outflow of funds in the first few days but as confidence is
restored this would subside and possibly reversed. Cypriots and other Europeans
would have faith that the cash in their pocket is worth what the ECB says it is
worth.
It would
also help the Cypriots believe that Europe is there not to punish them but help
them in their hour of need.
The ECB
should act now and support the Banking Cyprus banking system. It is in the
interest of Europe and the ECB. A Euro is a Euro everywhere and should not be
seen as a Mark.
