The Dijsselbloem doctrine could be the way to a fairer, more robust financial system, says economist Rens van Tilburg
Granted, the new eurogroup chairman could have handled the Cyprus question better. Small savers should have been exempt from the start and only bond and shareholders taxed. But the course Jeroen Dijsselbloem set out by demanding a contribution from financiers is a sound one. The big savers in Cyprus are largely and expensively responsible for the untenable inflation of the banking sector on the island. The Dijsselbloem method will also lead to the necessary shrinkage of a sector that is too big to be healthy.
The principle of making financiers pay has been heavily criticised. It would lead to bank runs elsewhere and end up being more expensive. It’s a threat that crops up every time euro countries can’t fully compensate every claimant.
Undermining seemingly secure financial facts can be a very bad idea indeed. Lenders will look at the risk factors even more closely and the cost of capital will go up. And yes, markets may panic and overreact.
But there’s a plus side. This time around, euro support was limited to the maximum debt that Cyprus can carry, some €10bn. It’s something that was never considered in earlier rescue attempts. The Irish state, pressurised by the ECB, had to shoulder the combined debts of the failed banks, which increased the financial pain of the Irish citizens enormously and left the financiers of the housing bubble shaken but otherwise unharmed.
You only get one opportunity to tax private parties and then they’re gone. In Cyprus the EU seized the moment. After the rescue of SNS Reaal and the partial write off of the Greek debt, this is another step in a new direction.
Whenever possible, private financiers should foot part of the bill. There may not be a blueprint but the European approach is definitely changing. The contours of a Dijsselbloem doctrine are becoming visible. The criticism from Moscow that this is a bolshevist breach of contract is unfounded. When the Greek debt was written off an anonymous EU civil servant said the same thing: contracts are sacrosanct.
Few things are sacrosanct in life, however, and in the free market there is no such thing at all. Capitalism knows no certainties. That is its strength. It forces people to think on their feet and deal with whatever unexpected situation they find themselves in as best they can. If someone cannot honour his contractual obligations, bankruptcy follows and the contract is cancelled. Subsequently and in all reasonableness a solution is found which leaves all involved out of pocket.
The euro crisis and its untenable debt positions is such an unexpected situation. It’s not just one baker or bike repairman going under. The whole system has ground to a halt. For this reason the agreements and rules that have led to this crisis need to be revised. They have to be reconsidered to include the values that hold this society together. The question to be asked it not what the rule is but what it was meant to achieve to begin with. A crisis by its very nature is a period of diminished legal security.
Take the rule that everybody contributes to public services according to his means. It’s a rule nobody takes issue with but which is constantly being undermined by fiscal experts, bookkeepers and bankers who, with one touch of their magic financial wands, turn tax evasion into its equally reprehensible but legal counterpart, tax avoidance.
It’s only right that the euro countries should refuse to prop up an important destination of money gained from fiscal trickery, such as Cyprus. The Netherlands shouldn’t expect to be treated with more clemency, should it ever come to this pass. Our parliament may have banned the term ‘fiscal paradise’ but that won’t change the Dutch image abroad.
A system is only sustainable if enough people benefit. The fact that a million and a half Portuguese are singing songs from the Carnation Revolution in protest against the cutbacks and that the Dutch figures for unemployment and crime are up, are a measure of the loss of citizens’ confidence.
The euro countries decided not to pander to the interests of the financiers for once. This creates unrest and costs. But this reorientation is the only way to ensure popular support. It’s also a step towards a more robust financial system in which private risks don’t end up on the shoulders of the people. And that must be worth something.
Rens van Tilburg is an economist
This article appeared earlier in the Volkskrant
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