Wednesday, March 20, 2013

And So It Is Cyprus - The Eurozone Has Found A Test Case

In the U.S., activist lawyers sift through cases that have the potential to rise to the level of effecting change on the law a la the U.S. Supreme Court.  These cases have to have the right set of facts that are specific enough while also possessing a permeating broad reach.  These cases do not always result in the activist lawyers' favor, however lessons are nonetheless learned.  Those that bear the greatest burden of the result are always the parties in the case - not the justice system, not the judges, and not the lawyers.

Cyprus is such a case and the Cypriots will see the result of being the test case for the Eurozone.

Cyprus is ideal as a Eurozone member State wind down.  Cyprus is a small country with little real effect on the Eurozone.  It has been used by Russian Oligarchs to offshore money for legal or illegal reasons.  Because of the outside interests being largely assigned to Russians, it gives the Eurozone a free pass on collateral damage.  There is, however, a certain hypocrisy on Germany's part as its banking interests were indirectly benefitted from the bailouts to Greece and other Eurozone countries.  The only difference is that Russia is not a Eurozone member state.

Cypriots are caught between two interests - one that sees it as a test case and one that sees it as a banking offshore account.  The vote against the bank tax by MP's led by a populist revolt against the bailout is in the Eurozone's best interest.  It is a way for Cypriots to publicly take responsibility for the wind down.  It also is a public example of a lack of governance because a one-time bank tax is simpler than a Faustian deal with Russia.  Any delay wreaks havoc on the local economy as bank runs destabilize Cyprus at an accelerated rate.

There is a warning for the Eurozone - a Cyprus exit may be not so discordant as is expected.  A somewhat bumpy exit for Cyprus would send a message that rather than deal with leverage inequity against Germany or France - just leave.  The fear of what a Eurozone exit and wind down would look like has been enough for member States to consent to bailout terms.  And if a member State exit is not a life threatening event, then the permanence and reliability of the Eurozone erodes for both member States and non-member States. 

This creates a greater divide between preferential treatment by non-member States for those deemed stable, stalwart Eurozone member States such as France and Germany.  The bond yields of France and Germany are an indicator of flight to safety.  A Eurozone future with a greater exaggeration of these member State differences is likely to create a generational political and economic quagmire. 

So the real test case for the Eurozone is not Cyprus, but the Eurozone's ability to keep the illusion of cooperation and common interests.

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