Is the cure worse than the illness?

Since the crisis began, the EU’s crisis policies have differed from those of the US. The contrast of results is manifest. The American economy has been growing, albeit sluggishly, for the second consecutive year, at about two percent — well above the recession in which the euro zone is mired. The unemployment rate, at seven percent, is also significantly lower, though not low enough for the US authorities, so much so that the Federal Reserve has announced it will continue manifestly growth-oriented policies until that particular imbalance falls below 6.5 percent of the active population. In Europe, on the contrary, all budgetary policies are oriented to austerity, which is producing more recession and unemployment, and no progress in the priority imbalance: that of public finances.

The EU’s public debt is rising due to bank bailouts made with public funds. Yet the problems of the banks are still far from solved and create huge instability. The case of Cyprus is fairly representative — as is the inadequacy of the decisions being made to address the problems. The proposal has been made that the bailout of a sick banking system be effected by a de facto violation of the safety of deposits, confirmed by the EU authorities after threats that these might be withdrawn from EU banks in October 2008.

The supposed remedy, a tax on all bank deposits, may in the end be worse than the illness. Among other things, it casts doubt on the reliability of agreements as essential to banking stability as the deposit guarantee. This guarantee, homogeneous throughout the euro zone, had taken shape as one cornerstone of the recently designed banking union. It is now being called into question, though under the form of a more or less heavy tax on deposits.

Though the EU authorities have now backed down somewhat, and the Cypriot parliament has rejected the rescue plan, this is one of the most effective ways of generating distrust not only in the banks, but in the whole system of authority that is supposedly coping with the crisis in the euro zone. Deposits of under 100,000 euros must be respected, free of any tax at all, while those over that figure — to which deposit guarantees do not apply — should pay. To play with people’s savings is a very dangerous game, and not only in Cyprus.

Despite the Eurogroup’s last-minute rectification, recommending that deposits under 100,000 euros be respected, the harm has been done. First, by the unease sown among citizens in the euro zone periphery; but also by the waning credibility of the EU institutions. What happened on Monday in the financial markets is only a foretaste of what may happen if heavy-handed blunders and fundamentalisms still set the tone.

It is high time these policies were reconsidered, particularly as they concern the economies most affected by the stresses in the sovereign debt market: setting aside this kind of repressive, morality-charged pedagogy, ineffective in resolving complex problems, and severe in its impact on the average citizen. The economies of northern Europe have to contribute to a revival of demand, a necessary condition if the euro zone as a whole is to climb out of the crisis.