If (when) the government of California’s fiscal imbalance means it is going to default on its debts, and that it cannot make good on its obligations, image this scenario:
A. The California governor and legislature confiscate some very large percentage (say, 10%) of all bank deposits of citizens in the state. A liquid wealth tax of the crudest kind. Is such a thing even legal?
B. Instead, the state asks Washington, D.C. for a federal bailout. Translation: California asks other state’s taxpayers to pay for past, present, and future spending on its taxpayers. In response, the U.S. Senate says yes to a bailout but only if certain conditions are met: see A above. Is such a thing even legal?
As of Friday, this is basically what is happening in the Eurozone member state of Cyprus. Right now. And since it is only a proposal, what are the people of Cyprus doing? If you guessed trying to withdraw their liquid property (a.k.a. cash savings) from the banks, you win. But “Is such a thing even legal?” extends to a grim reality: depositors are not being allowed to access their own savings. From the NY Times:
“This is a clear-cut robbery,” said Andreas Moyseos, a former electrician who is now a retiree in Nicosia, the capital. Iliana Andreadakis, a book critic, added: “This issue doesn’t only affect the people’s deposits, but also the prospect of the Cyprus economy. The E.U. has diminished its credibility.”
In Nicosia, a crowd of about 150 demonstrators gathered in front of the presidential palace late in the afternoon after calls went out on the social media to protest the abrupt decision, which came with almost no warning at the beginning of a three-day religious holiday on the island.
Under an emergency deal reached early Saturday in Brussels, a one-time tax of 9.9 percent is to be levied on Cypriot bank deposits of more than €100,000 effective Tuesday, hitting wealthy depositors — mostly Russians who have put vast sums into Cyprus’s banks in recent years. But even deposits of less than that amount are to be taxed at 6.75 percent, meaning that Cypriot creditors will be confiscating money directly from retirees, workers and regular depositors to pay off the bailout tab.
This raises some deep, philosophical questions about freedom, property, and individual rights. Should the bank deposits of citizens be protected from national confiscation? I think so. Are the stronger EU states making an error in asking for conditions? No, but this condition is not wise. The whole episode should make us wonder why a country cannot simply use a foreign currency — maybe it can (see Panama’s use of the dollar) but that does not guarantee the government and its foreign-denominated bonds support and backing from the currency maker.
Other interesting facts from the CIA factbook, which indicates to me that Cypriots are doing their best to deal with the mess of Greek debt. A shame, not their fault, nor the Germans fault, but where does that leave us?
Cyprus experienced numerous downgrades of its credit rating in 2012 and has been cut off from international money markets. The Cypriot economy contracted in 2012 following the writedown of Greek bonds. A liquidity squeeze is choking the financial sector and the real economy as many global investors are uncertain the Cypriot economy can weather the EU crisis. The budget deficit rose to 7.4% of GDP in 2011, a violation of the EU’s budget deficit criteria – no more than 3% of GDP. In response to the country’s deteriorating finances and serious risk of contagion from the Greek debt crisis, Nicosia implemented measures to cut the cost of the state payroll, curb tax evasion, and revamp social benefits, and trimmed the deficit to 4.2% of GDP in 2012.
Hat Tip to Tyler Cowen “This (wealth tax condition) could go down as a blunder of historic proportions. It also shows that EU governance already is a disaster and profoundly anti-democratic in the worst sense of that term.”