Cyprus / EU: Eurozone back in turmoil

The eurozone crisis has dramatically intensified during the last week. It has blown away the optimism of the ruling class in recent months that they had resolved the crisis. Once again, the continuation of the eurozone, as currently constituted, is seriously threatened.

The eurozone crisis has dramatically intensified during the last week. It has blown away the optimism of the ruling class in recent months that they had resolved the crisis. Once again, the continuation of the eurozone, as currently constituted, is seriously threatened.

The Cyprus crisis could also dramatically pose the viability of the euro. This time the threat has erupted not from one of the so-called PIIGS (Portugal, Ireland, Italy, Greece and Spain). The latest threat to the existence of the eurozone has come from Cyprus. It is a measure of the parlous state of the eurozone and the EU that Cyprus which accounts for 1:500 of the EU GDP (compared to Greece’s 2% of GDP), threatens the continuation of the current eurozone. These developments have intensified the crisis and raised again the spectre of rapid contagion to other countries, especially Italy, Spain and Portugal. Cyprus was also, at least initially, the first country to apparently call the bluff of the Troika. This threatens to set a “trend” for other eurozone countries to do likewise, something which Merkel and the other EU leaders are terrified of. While, at the time of writing, it remains unclear exactly how this new phase in the crisis will unfold, the developments in Cyprus represent the opening of a new chapter.

Arrogantly, like a colonial master, the Troika insisted that the Cypriot government confiscate a percentage of the bank deposits held by both rich and poor, 9.9% for those holding over 100,000 euros and 6.75% for others, as a condition for a bail out of 16bn euros. The Troika would provide 10bn euros with an additional 5.8bn raised by the Cypriot government.

This was perceived as a dictate by colonial rulers. Yiannaki Omiras, President of the Parliament, argued that, “Europe want Cyprus to return to be a country of limited sovereignty – neo-colonial”. The history of colonial rule under the Ottoman Empire and British imperialism is an important part of Cyprus’s history, fuelling opposition to measures being imposed by the Troika.

The confiscation of a percentage of the deposits of all savers provoked a massive backlash in Cyprus and other EU countries caught in the centre of the storm, especially Italy, Portugal and Spain. In one stroke, the imposition of this measure fatally undermined the insurance guarantee for depositors throughout the EU. This can lead to a flight of capital from other weak economies in the EU, such as Portugal, Italy and Spain. If the Troika could impose this on Cyprus, then why not Italy, Spain or Portugal and other countries when the next bailout is needed? It was a blunder by Merkel and the Troika, driven by the ‘hard-line’ Dutch, Finns and Slovaks in support of Merkel and German imperialism. The deposit ‘tax’ threatened to trigger a run on the banks in other countries, as depositors withdraw money from their accounts in fear that they could loose at least a percentage of them. The consequences of this miscalculation – reflecting the arrogance of the EU leaders and that they are lashing around for solutions – has only intensified the crisis.

President humiliated

In Cyprus, the reaction to the Troika demands was such newly-elected President Nicolas Anastasiadis, in power for just over two weeks, was left humiliated. Bullied into accepting the deal in Brussels, Anastasiadis returned to Cyprus to face a revolt of the mass of the population and all the political parties, including his own. In the end, not a single MP voted for the deal and the governing party, DRP, abstained on the vote! They effectively called the bluff of the Troika, which, in turn, put the ball back into the Cypriot court, by threatening to cut off ECB funds in days, by Monday 25 March. Such a move would effectively put Cyprus outside the euro-zone and possibly even the EU itself.

Developments in Cyprus can increase the pressure in other countries for the national governments to stand up to the Troika and the EU. However, the Troika will impose harsh conditions on Cyprus, to punish its people, as a warning to others that this will be their fate should they defy the Troika. Apart from the pressure by the mass of the population to oppose this measure there were other important factors which also allowed the Cypriot ruling class to withstand the demands of the Troika.

Deal with other powers

Unlike the Greek ruling class, the Cypriot rulers have the prospect to strike a deal with other capitalist powers outside the EU, in particular Russia. But the vote to reject the deal in the Cypriot parliament was not a vote against an austerity package. The cuts package had already been accepted by the previous government, led by AKEL (the Cypriot Communist Party), which has significant support amongst workers, and passed on to its successor. The bail out was a bail out of the banks, which together with tourism, are the mainstay of the Cypriot economy. Cypriot banking is awash with money from Russia – US$31bn invested in Cypriot banks by the Russian banking system alone – due to very favourable tax rates. The vote against the Troika package by the pro-capitalist parties was partly a vote to maintain Cyprus as an offshore tax haven. Banking, which is currently eight-times the size of the country’s GDP, has been teetering on collapse after being exposed to heavy losses as a result of the crisis in Greece.

At the same time, Cyprus has gas reserves worth an estimated 475bn euro. This, the ruling class had hoped, would give them the opportunity to broker an alternative deal with Russia. This revealed a clash of national interests between the capitalist and imperialist powers. The prospect of Russia acquiring a share of the oil reserves, in return for at least a percentage of the bail out, enraged Merkel and German imperialism, in particular. Even US imperialism is disquieted at such a development. The extension of Russian influence into an EU country will aggravate tensions with German imperialism and other EU powers. Reflecting this threat, it appears that the Russian deal has collapsed. At this stage, Putin and the Russian oligarchs do not want to come into a sharp collision with Germany and other EU powers, which would threaten trade and other commercial interests.

At the time of writing, the apparent collapse of this alternative deal has left the Cypriot government floundering around in a desperate search for a solution. Failure to secure one will possibly result in the ejection of Cyprus from the euro. This would undoubtedly provoke a major crisis in Cyprus. The introduction of a new currency would result in a massive devaluation and flight of capital from the country, massive hike inflation and a slashing of living standards.

Moreover, it would also put the question of the viability of the euro back on centre stage of the crisis. This follows a respite in recent months during which the ruling classes in Europe have claimed that the euro crisis was ‘resolved’.

Italy next?

Yet it has already emerged following the dramatic elections in Italy. Despite the lack of a socialist alternative for the Italian workers and masses, a clear majority voted for the anti-austerity parties. The populist movement led by Beppe Grillo took 25% of the vote, campaigning against the euro, for a return of the lira and a restructuring of Italy’s mountain of 9 trillion euro public debt. There is still no government formed in Italy. Greece Italy, the EU’s third largest economy, would make the drama of the Greek crisis seem like a minor side show in comparison. Moreover, Spain and Portugal also set to follow an eruption of the euro-crisis in Italy.

It is possible that the Cypriot government will be compelled to levy a higher tax on wealthy depositors and take other measures, such as nationalising the pension funds. This may allow Cyprus to remain in the euro for a period although this is far from certain. A new crisis would inevitably emerge, posing again the prospect of Cyprus’s ejection from the euro, if Italy, Spain or Portugal has not already gone through the exit door.

Need for a socialist alternative

The crucial issue facing the Cypriot workers and middle class is the urgency of building a mass movement to reject any austerity programme demanded by the Troika and capitalism and to oppose any measures which see the masses help pay for a bail-out of the banks.

Unfortunately, the leadership of AKEL is not organising a mass mobilisation and presenting an alternative programme to break with capitalism, as a way out of the crisis. In government, holding the presidency, until only two weeks ago, the party accepted the austerity package demanded by the EU and simply passed it on to the new government to implement. Today it calls for a “powerful response by the people” and “mass resistance”. It demands “the popularisation of the vision for the liberation of Cyprus from the suffocating embrace of the monopolies”. It urges people to take to the streets (AKEL Statement 16 March 2013).

However, AKEL is not offering a concrete alternative of what should be done in the face of this crisis and the prospect of Cyprus being ejected from the euro. AKEL is currently calling for opposition to the Troika but not the eurozone. Yet membership of the eurozone means acceptance of the austerity demanded by the Troika. Many Cypriot workers and youth will ask what it did when it was in government. In the recent elections, AKEL lost up to 25% of its vote compared to 2008.

There can be no trust in the capitalist government. In or out of the euro, these same capitalist politicians will attack the rights and living standards of the Cypriot working class.

The Cypriot government, elected only two weeks ago on a promise of securing a ’softer’ bail out, is now largely discredited. Now it is urgent to fight for an alternative government of the workers and others exploited by capitalism. Such a government would oppose the terms of the bailout and reject the austerity programme demanded by the Troika. The banks should be immediately nationalised, under democratic workers’ control and management. Working people reject austerity to keep the euro.

Such a government would face immediate ejection from the EU and the euro. A government of the working people of Cyprus would need to prepare for such a prospect. It would need to immediately introduce capital controls to prevent a flight of capital and for a new currency. An emergency economic programme would be necessary to defend the interests of workers and the poor. This would be possible on the basis of a democratic socialist plan of the economy through the nationalisation of the major companies and financial institutions.

However this crisis of the EU is a crisis of the global capitalist system. A socialist government of the workers and poor in Cyprus would immediately face the wrath of European and global capitalism. Temporary loans and trade arrangements could be negotiated with other states as an interim step. But it would need also to forge links with the working people of Greece, Spain, Italy and Portugal. It would be necessary to appeal to them to follow such an example. Together the working peoples of these countries could form a democratic, voluntary federation of Mediterranean and Iberian states. This could be a bridge to reach over to the workers of the rest of Europe with the aim of forming a democratic socialist federation of European states as an alternative to the capitalist EU and Troika.

The crisis in Cyprus has opened a new chapter in the crisis in the eurozone and the EU. It has illustrated that the crisis is far from resolved. Deeper and further crisis are certain to erupt in the coming weeks and months. On a capitalist basis there is no solution to the crisis. The struggle for a socialist alternative is now more imperative than ever.

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