THIS MUCH can be said fairly certainly about the new bailout plan for Cyprus: It’s a big improvement on the previous plan. Last week, the International Monetary Fund, the European Union and Cyprus’s own government concocted a scheme that would have propped up two of the island’s largest insolvent banks, partly by confiscating the supposedly insured deposits of small savers. The Cypriot parliament rejected it in the face of amply justified public protests. Plan B winds up the two banks, puts a de facto end to Cyprus’s days as an unsustainable offshore bank center and imposes the costs on big depositors — who include a disproportionate number of Russian tax avoiders and similar folk.
Beyond that, however, the implications are much harder to determine. Has Europe set a precedent, according to which big bank creditors, from uninsured depositors to bondholders, must henceforth assume that their funds are at risk? Who knows? Jeroen Dijsselbloem of the Netherlands, who heads the “Eurogroup” of finance ministers, suggested that such a precedent had indeed been set — whereupon a top official of the European Central Bank, Benoit Coeure, declared that Mr. Dijsselbloem was “wrong.” In his view, Cyprus is a “unique” case.
Wouldn’t it be healthy for Europe if bank creditors did get the idea that their funds were at risk, so that shaky banks would find it harder to get funded in the first place? Yes, according to those who say Europe’s problem has always been a “too big to fail” mentality. No, according to those who say that the Cyprus deal fatally undermined depositor confidence, thus making bank runs in other countries more likely.
Certainly Cyprus and its paymasters in the European Central Bank have broken a taboo of the common European currency by imposing controls on the flow of capital into and out of the country, albeit “temporarily.” As long as those controls last, a euro held in Cyprus is no longer as valuable as those deposited elsewhere. But even that measure can be justified by the greater threat of a bank run; to save the euro, it was necessary to destroy it, partially, in one place, for a while.
Cyprus is a template; Cyprus is a one-off situation. Deposits are susceptible to confiscation; deposits are sacrosanct. Capital controls are inconsistent with currency union — except when they are necessary. Maybe the real problem in Europe is that all of these statements are true, or might be true, depending on who’s talking, and where, and what particular interest — financial or national — the speaker represents.
The Cyprus experience confirms that the powers that be in Brussels and Berlin are improvising to meet the crisis du jour, which is what they must do to hold together a currency union absent the usual political, legal and regulatory infrastructure. Until that inherently confusing and unstable situation changes, Europe’s policymakers will continue to make it up as they go along. For better or worse, investor confidence will develop accordingly.