Over the last fortnight or so, the small, offshore country of Cyprus in the Aegean Sea has preoccupied the decision-makers of the European Union and the IMF on a daily basis. Undoubtedly the population and decision-makers of the country have been in a state of bewilderment as they feel their country’s sovereignty tossed about, and are forced to accept what they would have thought a month or two ago, to be both impossible and unacceptable.
The prospect of people’s private funds, held in private banks, being taxed, in effect sequestered, without their consent, can hardly be what the Cypriots expected when they first signed an Association Agreement with the European community in 1972, then applied for membership of the EU in 1998, and eventually acceded to membership in 2003.
Then, Cyprus’ membership of the EU arrangements was perceived by the citizens as a virtual guarantee of its sovereignty and practical independence, given the difficulties that the country has had since the 1974 Turkish invasion and the truncation of the state, with a Turkish military-guaranteed Cypriot-Turkish republic being established on the original island territory.
Yet, throughout the period after the Turkish domination of a part of the Cypriot state, the citizens have been proud of the country’s economic progress, its ability to diversify its economy and, in so doing become financially engaged with a number of major European economies, including that of post-Soviet Russia. The process of financial liberalization pursued by all governments, placed Cyprus in the ranks of successful small countries, taking advantage of globalization, and the substantial liberalization of capital movements that came with it. Cyprus came to be linked with other small European countries like Malta and Luxembourg, which had also proceeded on the path of liberalization, and with the strength of their economies guaranteed by linkages with major European countries and financial systems.
Cyprus, indeed, took advantage of its existence within a wider and relatively prosperous European economic space, to venture into both a private and public economic relationship with Russia, as that country transformed itself through a variety of hitherto banned capitalist activities – privatization of major state enterprises, liberalization of capital movements, and with that, the search by rich Russian capitalists for secure places for their capital, beyond the boundaries of a Russia which they did not believe to be fully liberal in political behaviour.
Cyprus, as well as, for example Malta, benefitted substantially from this Russian orientation, some of the Cypriot governments, including the last but one, being led or influenced by the Cypriot Communist Party, with its continuing nostalgia for the somewhat still autocratic Russian state of Putin.
But as with other countries in the EU – Spain, Italy, Ireland – the fascination with liberalization along with large scale public expenditure took the Cypriot government’s economy and its rate of debt to GDP to unmanageable levels. Regrettably for Cyprus, its debt problem came at the end of the European Union’s exasperating process of trying to sustain those economies, a process that cannot be said to be allowing the economic managers of the EU – the Commission and the Central Bank, and the IMF – to feel that they are really seeing any light at the end of the tunnel. What, in effect, these economic managers have done is to go to the extreme with Cyprus, and to do what they have not been able to do with some of the other depressed economies, even though measures have been harsh there too. The EU has chosen little Cyprus to do two things at the same time. First not to only take a general approach such as limiting public sector wages and other benefits, but, in order to bring the Cypriot banks under immediate control, to impose a substantial tax on the savings of individuals – in effect to nationalize the deposits of a specific group of individuals – originally those holding over 100,000 euros in deposits in the commercial banks.
Though that figure has been raised somewhat in the face of public outcry and Parliament’s rejection of the original agreement to be imposed by the EU Commission-Central Bank-IMF troika, the policy decision has raised the ire of Russia – whose citizens have a large proportion of the funds in some of the Cypriot banks.
Now, EU policy is perceived by the Russian government as prejudicial to itself and its citizens, the Russians seeing the action against Cypriot and foreign depositors as against the norms of a practice which is now widespread. They point out that Malta, for example, another small country without a substantial base for industrialization, has also pursued the practice of inviting foreign funds for placement at reasonable and secure rates of interest. There is a feeling within European official circles that Cyprus has sought an easy way towards economic prosperity which has been too contingent on circumstances in the international financial markets over which it can have no leverage. The European Union will no doubt now seek to encourage an ever-resisting Cyprus to come to terms with its problems with Turkey, especially as there are now good prospects for the drilling of oil in the Aegean Sea, though it is highly unlikely to be able to do so without the consent and cooperation of Turkey.
The major powers of the international community, which were highly annoyed by the Cypriots’ referendum rejection of the Annan Plan of 2004 intended to resolve the Turkish-Cyprus issue, now, it appears, will take the opportunity of this severe situation of a small country on its knees, to force the government of Cyprus to come to terms and, from the major European powers’ point of view, give Cyprus a more realistic prospect for economic development. It can be assumed that, in that context, sooner or later they will raise the Turkey-Cyprus issue with the latter’s government.
Small Cyprus now finds itself with little leverage, as both international finance and international and regional politics come together to resolve some problems with which the wider Europe has been concerned.
As with the case nearer home, in Jamaica, where the IMF has persuaded the government to use funds at the National Housing Trust (intended for public housing) to assist in the resolution of its immediate debt problem, as a condition of receiving larger financial resources from the Fund, the small country of Cyprus has been caught in a tight corner, and even in the face of massive popular protests, has had no option but to bow. Of course, Switzerland, another small haven of private financial resources, stayed out of the EU when it had the choice.
