George Friedman on Cyprus and the EU (Agenda)
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Editor’s Note: Transcripts are generated using speech-recognition technology. Therefore, Stratfor cannot guarantee their complete accuracy.
Video Transcript:
Colin Chapman: Claims that the European Union's shaving of bank deposits in Cyprus will save the Mediterranean island's shattered economy are hollow indeed. It's Cyprus that is being hollowed out. But that's not the end of it. Eurozone investors wonder who's next and isn't it time to pull money out of the Continent's weaker banks.
Welcome to Agenda with me, Colin Chapman, and Stratfor founder George Friedman. George, lets be clear. This deal keeps Cyprus in the eurozone but at a huge cost to the people.
George Friedman: Certainly, it hasn't saved all of Cyprus's banks. Certainly, it hasn't saved all the depositors. And certainly, it hasn't stabilized the Cypriot economy. What is has done is allow the European Union to claim that it's solved the problem without actually specifying what problem it actually saved.
Cyprus is now facing a profound crisis. The banks have certainly been told that the deposits under a 100,000 euros [$128,000] would be protected but frankly if you're a company in Cyprus -- and remember this is the local banks for Cyprus, not only places where Russians deposit money -- if you own property in Cyprus such as hotels, which are a major industry in Cyprus, you have substantially more than 100,000 [euros] on deposit. With that money you have to do payroll, with that money you have to pay suppliers, you have to pay taxes -- there are many things you have to pay. And the problem right now is that not only is a portion of that amount above 100,000 [euros] going to be taken by the state, but also -- and this is extremely important to understand -- the timeframe in which those deposits will become available is unclear. And that means there are people in Cyprus who are not going to be paid. They're not going to be able to pay their mortgages, they're not going to be able pay their rent, they may not be able to buy their food.
We have created a solution, which, inside of Cyprus, is an absolute catastrophe and I think the most significant thing about the European Union is that now it clearly doesn't care. There was a period a few years ago when the European Union had, as one of its goals, softening the blow. Well, that's gone by the wayside in Spain and Greece with extraordinarily high unemployment rates. But now in the case of the Cyprus, it really doesn't seem even to be a matter and somehow the European Union and its officials are regarding the Cypriots as illegitimate members of the European Union -- as inappropriate to be there, they shouldn't have been in there in the first place. Which I think is altogether true but it has to be remembered that the European Union allowed them to join, under whatever circumstances were busily expanding the union, and now are taking no responsibility whatsoever for the citizens for Cyprus, which is going to resonate throughout the union.
Colin: Cyprus is being crushed, but it's wider than that, isn't it, because with exchange controls, there's no single currency. A euro in a Cyprus bank is now worth less than a euro anywhere else. A currency union with currency controls just can't be a currency union.
George: Well, this is what's particularly interesting. One of the principles, a founding principle, was the mobility of capital, that you can move money from one country to another at will as you can move people from one country to another at will as you can move goods at will across the borders. In the case of Cyprus, they have now established that that isn't the case. In the case Cyprus, the money does not any longer flow freely cross borders. And they're setting a precedent. They're setting a precedent in this case for what the European Union can impose on Cyprus and what Cyprus is allowed to do in concert with the European Union. But I think other countries such as Spain, such as Greece, such as Italy, will be asking the question "Well if Cyprus can control the amount of currency flowing out, can we control the amount of goods flowing in?"
The free trade zone -- which is far more important to Europe than the euro -- the free trade zone which is the foundation of the entire EU enterprise, that itself is now at risk because the principle has been introduced that no, capital cannot float freely. Therefore, in the case of Cyprus, no, goods cannot flow into Cyprus freely, and where does that end? Everybody's saying that Cyprus is a special case. For years now we've been hearing in the European Union that everything is a special case. At a certain point the special case because very normal.
Colin: Yes. Now, lets go back to what you called the precedent. Others have labeled this a template forcing better-off depositors to take a haircut. The head of the eurozone finance ministers latched on to this, saying it meant it would now allow them to go after private money to fund bailouts. Pretty quickly European Central Bank members then dived in to say this would not be a model for the future. And then an EU official contradicted this. Confusion all around.
George: Well, the problem is not that the European officials are contradicting each other -- they've been contradicting each other for several years. The problem is that they are really running out of options. Even Germany, with all of its wealth, cannot bail out all of Europe's banks. Many of these banks have deteriorated under stress tests that weren't very stressful and regulations that weren't very onerous. And many of these banks are in trouble. It's going to be very difficult to save all of them, unless deposits are seized. Now, anyone who is doing business in Europe, has a company in Europe who, for example, is an American who is looking at all this, who is quite comfortable leaving money for operating expenses in Europe, is now thinking perhaps it'd be better to keep a minimum amount of money necessary to operate in Europe and have as much of that money outside the reach of the European Union as possible back in the States because they can go and transfer it in as needed.
If that becomes the norm, there is going to be a tremendous weakening of the banks because there's a great deal of foreign money in European banks that is not there just to be in banks, that is there because people are doing business. If people become wary of those banks, they could lighten up the amount of deposits they have and cause the very problem the European Union is fearing, and is experiencing in Cyprus. So it really comes down to a question of the confidence in Europe's banks. And what has happened in Cyprus just dealt a blow to that confidence and the European Central Bank clearly wants to shore it up.
Colin: And its not just confidence in banks, is it? Its confidence in Europe itself. An analysis of country ratings show five European nations, including Britain, sliding while Latin American countries are actually coming up.
George: Well, again, sovereign debt and the credit rating agencies are another story we can talk a long time about. But this much is clear: the European financial system is deteriorating after years of attempting to stabilize the situation. After having declared that it's stable, it's still weakening and the Cyprus situation has done nothing good for it. What the Europeans regard as a solution is actually a very frightening road map for most people. Latin America, on the other hand, has improved remarkably so the world does not stay the same. While Europe has been weakening, other the parts of the world have been strengthening, Latin America among them. And frankly when you compare the United States and it's anemic growth but still growth, it's high unemployment but still far lower than most of Europe, when you compare the United States and its performance after all the criticism in 2008 with Europe's, there's no question where confidence is higher -- even with a Congress that is irrational and a president who likes to fight with the Congress. The shape of the world is such that what once was not too long ago the certainty of the vibrancy and health of the European Union, is not only long gone but is in the process of being buried.
Colin: Stratfor founded George Friedman. Thanks for watching Agenda, see you next time.
