by Adam Richardson
“Huge losses”, “Tough terms”, & “Strong medicine” – a few choice phrases that jumped out at me this morning while quickly scanning the news about Cyprus.
Quick scans, that’s the only way I allow myself to read the news these days. This is in order to get a general feel for whats happening (or at least how it is being portrayed in the media) without indulging in the toxic spew of opinions and wildly spun variations of what is a fairly straightforward story.
By the time my coffee cup was empty I was done scanning and went out for a morning walk in the springtime sun, a ritual that helps to clean my head for the day and detox from the brief exposure to the news. Upon returning home I found I had received an email from a friend who has been thinking about Cyprus as well.
The following is what my friend Nigel “The International Austrian” has to say on the matter (as Nigel is specialist in economic analysis, I listen to what he has to say. I suggest you do as well)…
Enter Nigel Bolton Shaw:
Der Spiegel reminds us that the fallout from Cyprus continues. The decision of Brussels to encourage Cyprus officials to confiscate up to 60 percent or more of the funds of big depositors is going to have long-term effects – beyond what was intended.
The article entitled “Bail-In Blues,” reports that Luxembourg leaders are convinced more bank deposit levies could lead to a Eurozone panic and a generalized departure of capital from European banks. Of course, Luxembourg itself has a great deal to lose as a so-called tax haven.
Tax havens are districts that attract depositors with promises of bank secrecy and generally secretive services that are enticing to those who do not want to make their savings generally known. The money deposited may or not be “illegal” or even untaxed but such is the reputation of tax havens that the assumption is such funds are not entirely legitimate.
In the case of Cyprus, Brussels in particular wanted to make a statement that an Eastern European and Russian element attracted to the island nation because would suffer consequences from their use of such services. Surprisingly, Russia itself went along with the EU’s perspective, with Vladimir Putin making it clear that his country has no more use for such tax havens than the EU.
Despite this united front, many voices have been raised especially in the media warning heavy handed tactics are going to backfire. And even though Luxembourg is a “tax haven,” this doesn’t make the warning emanating from its leadership any less credible. Here’s more from the article:
The debate over this week’s “bail in” of bank account holders in Cyprus as part of the country’s debt crisis bailout is continuing to simmer in Europe. In Luxembourg, Finance Minister Luc Frieden has warned that the example set in Cyprus by taxing people holding €100,000 ($129,000) or more in their accounts could drive investors out of Europe.
Earlier this week, Euro Group President Jeroen Dijsselbloem sparked an enormous controversy after stating that the solution found in Cyprus could be applied throughout the euro zone in the future.
The remark triggered immediate criticism from his predecessor as head of the Euro Group, Luxembourg Prime Minister Jean-Claude Juncker. “It disturbs me when the way in which they tried to resolve the Cyprus problem is held up as a blueprint for future rescue plans,” Juncker told German public broadcaster ZDF earlier this week.
“It’s no blueprint. We should not give the impression that future savings deposits in Europe might not be secure. We should not give the impression that investors should not keep their money in Europe. This harms Europe’s entire financial center.”
But in the European Parliament, politicians are considering ways to make banks bear greater responsibility for their own financial problems. Lawmakers are considering the European Commission’s proposed banking resolution legislation for faltering financial institutions …
Regardless of the exact nature of these regulatory discussions, Jean-Claude Juncker is correct that using Cyprus as a blueprint is counterproductive. The EU is trying to send a message to those with illegal money pools that their funds are not safe anywhere in the world, but this is not a message that will resonate.
What WOULD work is less taxation and fewer monetary and fiscal regulations – thus reducing the incentive for tax avoidance and money laundering. But the idea that raids on perceived offenders will create a generalized acceptance of monetary rules is likely naïve. The profits that are taken by such actions are tangible, while the penalties are only hypothetical.
It is far more likely that Brussels, by insisting on the Cyprus “bail in,” has badly frightened small savers that make up the bulk of many bank customers. In doing so, it is destabilizing an already fragile bank structure – and on that EU officials have worked on stabilizing for the past half decade or so.
EU officials have in the past denounced “tax competition” involving various EU countries that seek to undercut each others’ industrial policies by offering favorable rates to tempt businesses and wealthy potential citizens. But this sort of competition is a fact of life, given that the EU’s reach is continental not global.
Much better to reach accommodations with citizens over optimal tax rates and regulations that are sensible rather than overly burdensome. This would go a long way toward reducing non-compliance and make the EU’s efforts at stabilizing and expanding the eurozone more effective.
As it is now, EU officials have the worst of both worlds. The Cyprus example will not deter those who are aware of the profits to be made by flouting EU dictacts. At the same time, smaller depositors that make up the majority of commercial banking business are now going to be tempted to secure their funds by removing them or sending them outside the EU.
Whatever EU officials were thinking, they may wish to generate a “rethink.” They are not apt to realize their goals and may indeed be worsening the situation they intended to rectify.
Nigel Bolton Shaw specializes in international Austrian economic analysis and writes for numerous publicationsincluding Global Speculations where you can see more of his work on a regular basis. Latest: ‘Tax Havens? Russia Stands Aside’ @ http://www.globalspeculations.com. Articles provided to Q Wealth are original compositions not to be found elsewhere.
Adam again. What do you think, what lessons are we to take away from all of this? More importantly, how can we help you to make YOUR plan?