The dreaded abolition is here de facto the free movement of money between Eurozone countries. And it has happened as always, quietly, behind closed doors, and in the country of Mediterranean soda experiments: Cyprus. The first case to come to the New York Times forum It was Marios Loucaides, a Cypriot businessman who had the audacity to try to buy a flat in neighbouring Athens a few weeks ago.
Don’t think this was some massive purchase or a deal worth millions of euros – no. It was simply a matter of buying a modest flat for €170,000. Mr Loucaides agreed with the Athenian owner that he would transfer the amount upon his return to Cyprus, something that should be perfectly normal and routine between EU countries sharing a currency in the much-vaunted Eurozone. But no. The money could not leave the country after endless obstacles, and the sale fell through. The Athenian owner will have to find a buyer with real money – that is, euros, not Cypriot currency.
As Mr Loucaides rightly points out, a euro in Cyprus is no longer the same as a euro in Portugal, Spain or Greece, nor, of course, in Germany. «Cyprus’s euro is second-class«, said the Cypriot businessman. And that is indeed the case, although many Spaniards find it hard to believe (precisely the same Spaniards who, incidentally, also refuse to believe that their bank deposits here could be seized at any moment).
In fact, capital controls are a tool used in times of crisis around the world, and although they are extremely rare in Europe, they do exist. For example, Iceland, which is not a member of the EU and uses its own currency, imposed such controls in 2008 following the collapse of its major banks. And that is precisely where we are on the European periphery, but in a more subtle way, for the time being.
With a GDP of just €23 billion, and falling, Cyprus is little more than a serious blunder in a eurozone worth €9.5 trillion. But also that small Mediterranean country is the first to be leading the way in restricting the free movement of euros within the Eurozone. And the question we must now ask is: has the break-up of the Eurozone—which has prompted so many feverish, desperate, late-night meetings in Brussels—already begun? Have so many periodic, desperate attempts, and so many hundreds of billions of euros pulled out of a hat to prevent this fracture over the last three years, been in vain? Possibly, and however much it pains us, that is the case.
The President of Cyprus, Nicos Anastasiades, believes so: «We’re actually out of the Eurozone now«, he said, referring to the restrictions imposed on the free movement of capital by Cypriot banks. That is the clearest evidence that Cyprus’s euros have a different status from those of Germany or France, and even from those of the remaining 14 countries.
"It is a strange situation," said Mr Anastasiades in an interview. EU rules made it very clear in the Maastricht Treaty that restrictions on capital flows were prohibited, but the measures taken in Cyprus by the ECB and the EU’s executive arm, the European Commission, are effectively preventing money from leaving the country. And whilst the ECB refrains from commenting on the situation in Cyprus, the official line in Brussels remains apparently committed to maintaining the euro as a single, unified currency (sic). Yet another sign that politics is drifting ever further from reality, truth and ethics.
However, various voices, such as that of Guntram B. Wolff, Director of Bruegel, a Brussels-based research group, maintain that Cyprus has been quietly and de facto expelled from the Eurozone, since «The euro in Cyprus is not the same as the euro in Frankfurt«The capital controls imposed in March have certainly been relaxed, but they remain an insurmountable barrier to business and to any economic activity undertaken by Cypriots abroad. To give an example, a letter of credit from a Cypriot bank is worthless, and business owners are forced to pay for foreign goods in advance.
The restrictive conditions are constantly being changed. The limits for individuals and businesses are gradually being relaxed, but invoices and all manner of documents must be submitted to justify any transfers abroad. And for amounts exceeding €300,000 for individuals and €500,000 for companies, explicit authorisation from the central bank is required. These prohibitive obstacles to any international trade operations make it impossible to compete with the free and fluid transactions taking place in other countries, thereby deepening the collapse of the Cypriot domestic economy.
It is still prohibited to cash cheques or open new accounts, unless you already have an account with the same bank. Individuals cannot withdraw more than 300 euros a day, and businesses 500 euros a day. Signs at airports warn travellers that they cannot take more than 3,000 euros per adult out of the country. Just like in any run-of-the-mill banana republic, really.
All these restrictions and the paperwork required, combined with the increased costs of any transaction, mean that the value of a euro in Cyprus is effectively lower than that of a «free euro» in the other Eurozone countries. «Our euros look like euros and we perceive them as euros, but they aren’t really euros«said Alexandros Diogenous, managing director of Unicars, a Nicosia-based company that imports cars from the VW Group in Germany. «Proof of this –says Mr Diogenes– is the interest rate differential between Cyprus and the rest of the Eurozone. I’m paying 7.751% on long-term loans, whilst my partners in Germany pay 3 or 4.1%«he said. What’s more, most Cypriot banks have stopped lending altogether.”. This must all sound familiar to you, doesn't it…? Well, remember that saying about the neighbour's shaved beard and the soaking your own needs.
«The way the Cypriot euro is being treated jeopardises the very essence of the single currency as a whole«says Harris Georgiades, Cyprus’s new Minister of Finance. He says he would like to lift the restrictions by the end of 2013, but that to do so he would need unspecified aid from the ECB to ensure that the Cypriot banking system could remain afloat. In other words, that longed-for Greek- and Portuguese-style bailout, which the northern Europeans have decided must never return. A German-Dutch-Finnish spell which, on the other hand, is perfectly logical, as it directly shields their own pockets.
The problem with capital controls is that we know when they are imposed, but not when they can be lifted. Because the fear of what might happen once freedom of movement is restored only serves to exacerbate the system’s dysfunction. Iceland’s controls remain in place five years on. And the Cypriot authorities initially said these were only one-week controls, later extending them to 30 days… Four months have now passed since those articles we titled «The capital controls begin today» and «Cypriots or idiots«, and the authorities are still waiting for fresh funds from the ECB to rouse them, at least temporarily, from the nightmare of capital controls and bank seizures. Funds which, needless to say, will never arrive.
But what’s worse is that Cyprus doesn’t even enjoy the benefits of not sharing the euro with the rest of the eurozone. It cannot devalue its currency in the way that the British or the Swedes can. They are trapped in a monetary punishment cell with no end in sight. The example of Cyprus made it clear that bail-outs would henceforth be bail-ins, and it seems that the next step will be to use the «Cyprus experiment»to test the creation of a second-class euro that looks and feels politically correct, a model that could be applied to the rest of the struggling periphery.”.
As we said in «The Eurozone is dead: Long live Europe«It seems that the single currency is quietly fading away. And the de facto separation of Cyprus from the rest of the Eurozone is clearly a pilot scheme designed to take the break-up of the euro a step further, whenever and wherever the union becomes unsustainable.
Today, some of us have already realised that loans in euros carry a different interest rate to the price of German or Luxembourg euros, and that the security of deposits in those euros held in Spanish banks vanished a few years ago, just as the creditworthiness of sovereign debt did. And we must prepare ourselves, because we may be dangerously close to the point where euros cease to enjoy their current freedom of movement, as has happened to the Cypriots. Because this is not a matter of distant financial measures and misfortunes such as those that occur periodically in Argentina or Zimbabwe; no. Many of the things happening in Cyprus are already happening to the rest of the European periphery as well. But most investors and savers will realise this too late, when their euros have already lost their free mobility and have become more or less trapped in a tangle of legislation that will pray for them to be «exceptional and temporary«, as every government promises with impunity. But when they come to terms with the harsh reality and realise that, without knowing how or when, the situation has changed forever, those euros with reduced mobility, their euros will no longer be worth the same as German euros. And the harsh reality will be that their assets will have been unable to escape this Kafkaesque metamorphosis of the misnamed Single Currency.