Dour Island Story

by Andrew Stuttaford

I have been waiting expectantly to see what the Daily Telegraph’s grim Ambrose has to say about the Cyprus shambles. He doesn’t disappoint. The whole piece is well worth reading, particularly for the discussion of the extra, ‘concealed’ funding that will be channeled through the ELA, the  ECB’s Emergency Lending Assistance, but let’s also look at what Mr Evans-Pritchard has to say about what lies ahead for Cyprus:

The country has just lost its core industry, a banking system with assets equal to eight times GDP, and has little to replace it with. Cyprus cannot hope to claw its way back to viability with a tourist boom because EMU membership has made it shockingly expensive. Turkey, Croatia or Egypt are all much cheaper. Manufacturing is just 7pc of GDP. The IMF says the labour cost index has risen even faster than in Greece, Spain or Italy since the late 1990s.  What saved Iceland from mass unemployment after its banks blew up – or saved Sweden and Finland in the early 1990s – was a currency devaluation that brought industries back from the dead. Iceland’s krona has fallen low enough to make it worthwhile growing tomatoes for sale in greenhouses near the Arctic Circle.

If Cyprus tries to claw back competitiveness with an “internal devaluation”, it will drive unemployment to Greek levels (27pc) and cause the economy to contract so fast that the debt ratio explodes. The IMF’s Christine Lagarde has given her blessing to the Troika deal, claiming that the package will restore Cyprus to full health, with public debt below 100pc of GDP by 2020. Yet the Fund has already been through this charade in Greece, and her own staff discredited the doctrine behind EMU crisis measures. It has shown that the “fiscal multiplier” is three times higher than thought for the Club Med bloc. Austerity beyond the therapeutic dose is self-defeating.

Nobody should underestimate the absolute determination of the euro zone’s leadership to keep their vampire currency alive. That’s why (contrary to what I sometimes read in the comments!) I have repeatedly resisted predicting its demise. Like Stalingrad it must be held on to, regardless of the cost. And the measures to secure that dubious and self-destructive objective grow ever more desperate. What, I wonder, would those who were so blithely denying the need for a Greek bailout back in the halcyon days of, oh, 2010 make of the wasteland that confronts them now?

Back to Evans-Pritchard:

The Cyprus debacle has taught us yet again that EMU has gone off the rails, is a danger to stability, and should be dismantled before it destroys Europe’s post-War order.

Indeed it should. But how? A ‘starburst’ dissolution would risk, I believe, bringing down that postwar order very quickly indeed. Step by step is the way to go. The first of those steps should be the creation of, yes, the Northern Euro. And even that will be far from easy. And far from cheap.

Evans-Pritchard concludes that “the denouement will arrive when the democracies of southern Europe conclude that recovery is a false promise and that the only way to end mass unemployment is to break free of EMU’s contractionary regime. It will be decided by Italy, not Cyprus.”

Maybe. Time will tell.

Tick tock.

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