Cyprus is a tiny country with a population of 1.1 million. Yes, on its own, demographically and even economically, Cyprus is a relatively insignificant nation. However, Cyprus is a full member of the EU, since 2004. As such, at a critical juncture, whatever Cyprus does (or fails to do) in the economic, monetary and banking front can be crucial for the rest of the EU and even for the world at large.
“Globalization is such a powerful force that not even the Vatican can subtract itself from it.” This was last week’s post opening statement. And it can’t be more true. Now we see the extremely intertwined connections between the global society and one of the tiniest nations on Earth.
The initial agreement in the bailout package reached between the cypriot government and its major creditors on Sunday, March 17 was a catastrophic one. If that agreement had not been modified, it would have implied, at the very least, a classic bank run on Cyprus banks. The probability of a contagion effect in the rest of Europe, probably beginning with nations like Spain and Italy, was extremely high, almost inevitable.
Understandably, the terms of any rescue package raise questions in regards to future bailouts for other troubled nations. From this standpoint, there are some common-sense universal rules that any nation integrated into the global financial community must adhere to.
We all are well aware how tough and tiresome those kinds of negotiations can be. In this particular case, it seems like Cyprus’s new government administration (with knowledge and, at the very least, tacit consent of the so-called troika –the EU, European Central Bank and the International Monetary Fund), was willing to venture into new grounds: partially confiscating small bank deposits, through a new tax, called a ‘stability levy’. That is, for good reason, a superlative No-No. Yes, Cyprus is one of the less transparent offshore financial centers in the world, with tens of billions of dollars worth of Russian money. the cypriot Frankenstein-financial status got there thanks to the relative indifference of the EU in the first place. Moreover, when Cyprus was accepted as a full member of the EU, therein was an implicit approval of its financial soundness. With the benefit of hindsight, that was utterly wrong. The EU has to assume its responsibility in that decision and provide the means to solve it.
The repudiation reaction of the international financial community to Cyprus originally proposed bailout was swift, decisive. Financial markets did what was expected, producing a sizeable down day in Asian risk assets. Europe, in turn, opened on Monday morning with a likewise significant loss, reversing during the day when the vote in the Cyprus parliament was postponed for the following day, to give more time for the Cyprus Ministers to reformulate their proposal to parliament.
We can imagine how many telephone calls, mails, and even some last-minute meetings took place between the evening of Sunday 17 and early Monday morning (Europe time). In most likelihood top government US officials must have played a crucial role, as well as the highest posts in the EU itself.
Regardless of how the evolution of this Cyprus affair in the coming weeks and months, the quick reversal of the proposed bailout package currently in progress is a most welcome development. The gained level of economic consciousness from this experience about the extremely close (irreversible) interconnectedness among the world’s nations is very relevant.
It is not an exaggeration to state that a very strong evolutionary change in world governance, in the right direction, has occurred. Granted, it only refers, for the time being, to the monetary and economic aspect. Nonetheless, the monetary and economic aspects of society are a profound component of it. They are part of society DNA. Politics without economics do not get far, and viceversa.
A new virtuous precedent has been set. There is not other similar event before this one.
The world’s global society is far from a formal unified globalized governance system. It may still take a few decades to get close to it. However, the immediate and decisive reaction of world monetary and economic authorities, not ruling out direct intervention of presidents and prime ministers, to the big mess unattended Cyprus would have done, is a very promising manifestation about most likely developments in the coming decades.
Further down the road, additional political integration in different regions is to be expected in the coming years. The major reasons behind it, are of the most pragmatic nature. It does not have much to do with political ideology. It’s all about the world and its countries functioning in the most appropriate way, for the benefit of society at large.
The global society is inexorably moving towards a more formal level of socio-economic integration. The Cyprus incident is a strong testimony in that direction.