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Cyprus Suffers EU Folly
The EU’s structured bailout for Cyprus is economic madness.

Cypriot students protest in Nicosia, March 26, 2013.

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John O’Sullivan

The phrase “democratic deficit” was first used in relation to the European Union (then the European Economic Community) as early as 1977. Wikipedia attributes this first usage to the “Young European Federalists” in a manifesto written by Richard Corbett, who later became a Labour member of the European “Parliament.” As Wikipedia primly puts it, the phrase refers to “a perceived lack of accessibility to the ordinary citizen, or lack of representation of the ordinary citizen, and lack of accountability of European Union institutions.”

Well, you can say that again — and, as it happens, many people have said it again, indeed repeatedly. Since 1977 both skeptics and enthusiasts have acknowledged, some angrily, some sadly, that that the EU lacks democratic accountability to the peoples of Europe and that it is fundamentally run by a bureaucratic oligarchy. One former EU commissioner, the distinguished Anglo-German scholar Ralf Dahrendorf, pointed out drily that if the EU were to apply to join the EU, it would not be admitted, because it does not meet the democratic standards required of member states.

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But acknowledgment that there is such a deficit never seems to result in any serious attempt to reduce it, let alone eliminate it. Indeed, the mere acknowledgment is treated as a solution to the problem. This is a rhetorical tactic (pioneered, I think, by the late Richard Crossman, a British socialist intellectual and cabinet minister, to justify the failure of his housing ministry to produce any houses) that goes roughly as follows: “Yes, there is a democratic deficit, I’m afraid. It’s something we’re very worried about. It’s a very tricky problem and will need some thinking about. Rest assured, however, we’re very conscious of it and the need for a solution. Next question.”

And that has been the response of the Eurocrats and their camp followers for the past . . . well, we can date this precisely . . . 36 years. So it is hard to accept that they intend to remedy it. And, to be fair, it cannot be remedied if the EU remains formally and practically committed to the idea of ever-closer union, since that means that nations, parties, and voters cannot really adopt policies in conflict with that commitment.

As long as the EU staggered along without a major internal crisis, this democratic deficit remained below most people’s radar. But the euro has changed all that. What the euro crisis has revealed is that euro-zone membership compels the adoption of some policies and forbids the adoption of others  – which in both cases could have a major impact on the lives of ordinary citizens. In the case of Spain, Italy, Portugal, and Greece, it has compelled their governments to inflict massively deflationary policies on their peoples with the result that unemployment has risen to levels as high as 27 percent (and youth unemployment to levels around 60 percent). Given that their economic difficulties arise from the fact that for these countries the euro is a heavily overvalued currency, the rational solution would be to devalue — as Iceland has very successfully done in circumstances even worse than those in Europe’s “Club Med.” But devaluation would mean leaving the euro zone (or participating with other countries in its restructuring), and this conflicts with the inevitabilist politics of ever-closer union. Unless that changes, the nations of southern Europe will have to stagger through the Slough of Despond indefinitely. That’s not a problem from the standpoint of Brussels or Berlin; it’s a solution called “internal devaluation.”

So the democratic deficit has begun to bite hard.

It is biting down to the bone this week in the Cyprus crisis. In order to ensure that Cyprus remains within the euro, the EU’s finance ministers have structured a bailout that, among many other things, destroys the island’s offshore banking business (worth at least 20 percent of its GDP); prevents tourism from taking up any slack because euro-zone membership prices Cyprus out of a market that includes Turkey and other low-cost destinations; expropriates 40 percent of the holdings of all depositors with accounts above 100,000 euros (most of whom are not in the Russian mafia) in all Cyprus banks (most of which are not insolvent); inflicts on the island’s people and investors a draconian system of exchange control that will disrupt their business dealings and curtail their exports; and creates a de facto separate currency with all the negative effects of a devaluation but without its main positive effect — namely, the economic incentive for the Cypriot economy to restructure itself and expand out of depression.

This is economic madness, political folly, and a frightening precedent for any EU member state that has a strong financial sector and/or tax rates lower than those in France or Germany (Britain and the Baltic states respectively, please note). It is a policy that could never be sustained within a democratic political structure. Thus it is the latest — and, so far, the most savage — effect of the democratic deficit.

Indeed, the only way that Cyprus can reject this dystopian future would be to leave the euro zone, which would mean leaving the EU altogether. In my view that would be more rational than to stay within this poisoned Shirt of Nessus, but I can readily understand the Cypriot government’s reluctance to take such a bold step. At this point all next steps are bound to be painful, and the painful consequences of a withdrawal would be blamed on Nicosia rather than Brussels.

At some point, however, a government or an electorate in southern Europe will decide that the endless pain of being in the euro zone is far worse than the temporary pain of leaving it. Democracy within the nation-state will prove to be the remedy for the EU’s democratic deficit. After a tough transition, it will begin to prosper, and every other EU member state will pay attention and ponder.

Cyprus might have been that nation — the Grenada of the currency crisis, so to speak. But that distinction is now likely to fall to another, maybe Italy, maybe Spain. When it happens, however, the whole house of cards will tumble down — and a restructured EU without a democratic deficit, as well as a restructured euro zone, will force themselves onto Europe’s reform agenda.

And Richard Corbett, who first discerned this fundamental flaw? What has happened to him since 1977? Mr. Corbett is currently an adviser to the president of the European Council, Herman Van Rompuy, and in November a panel of Europe’s great and good voted him the fourth-most influential Briton on EU policy. It is odd, therefore, that this influential Eurocrat has not managed to fill up the democratic deficit he discovered to any noticeable extent. Too busy? Still puzzling it out? Perhaps utterly baffled?

I wonder if he will get round to it before history does.

— John O’Sullivan is editor-at-large of National Review.



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