Jeroen Dijsselbloem did the right thing
Cyprus is a disaster. As I see it, many mistakes were made, for instance during the boom years 2004-2007, when the ECB stubbornly refused to look at developments in individual countries and for reasons connected to ‘rational expectation economics’ (you can read more about that here) equated financial stability with low and stable inflation. And it was not the case that nobody warned. In 2002, Cladio Borio and Philip Lowe from the Bank of International Settlements warned, In 1992 Wayne Godley warned. Minsky even had a whole subset of economic crises named after him. After the boom, the ECB failed to engineer really low interest rates for households and companies in southern Europe – they should have bought much more government bonds (no, in a situation where M-3 money in Greece has declined with about 40% that’s not inflationary).
Well, no crying about spoiled trillions. But did Jeroen Dijsselbloem make a mistake when he stated that depositors with more than 100.000,– should take a hit? Of course not. So, why did Dijsselbloem get all this flack in the international press? In Ireland, poor people are at this moment paying higher taxes because large depositors and senior bondholders were bailed out. In Cyprus, these large depositors and bondholders are getting ‘Diogenes shares‘. So, I’ll ask the question again: ‘Why did Dijsselbloem get all this flack’?
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Real-World Economics Review Blog 
He deserves it first because he agreed to the original deal in which small depositors were hit. This would have been both unfair and massively destabilising. It’s no excuse to say that the Cypriot President had the idea. On other occasions the ECB and EU have enforced their will, for example in insisting Ireland pay out on non-guaranteed bonds.
Second because in that initial deal the bondholders of banks were given a free ride.,
Only protests by people in Cyprus stopped this very damaging deal being done.
And finally because he shoots his mouth off, saying one thin and then tweeting another. he is so not ready for Prime Time that it speaks volumes about EU incompetence that he has the job. We got the right answer in spite of not because of him.
Dear Mark,
Completely agree with the ‘People of Cyprus’ statement: https://rwer.wordpress.com/2013/03/25/lets-say-thank-you-to-the-brave-cypriot-parliament/
I still do not understand why everybody was so upset about Dijsselbloem’s original statements which only confirmed in public what everybody knows in private, but it was not about sex but only about money so what’s the buzz about? I mean: this was not blunt in any way. Might however be a cultural thing: I share his nationality.
Anyway: we will have to write down an additional 500 billions or so of debt in the Eurozone (unless the ECB steps in), wich means that creditors will be hit by an equal amount. Which creditors? My pension fund? People with large deposits? Banks? Should it be financed by lowering income of banksters? Or do the tax payers have to pay the bill? The problem is that unemployment is increasing, house prices in a number of countries are coming, wages in a number of countries are being cut while government bonds are no safe assets anymore. Let’s at least agree that tax payers with a low and medium income and small depositors have to pay as little as possible – the brunt will have to be paid by levies on whatever kinds of wealth, instead of income.
Because his original proposal was to tax all deposiitors and 100,000 euros in the bank doesn’t mean you are rich-could be a small business etc
Agree about the businesses. 100.000,– for a family is however a lot of money.
Merijn Knibbe, Can I just say thanks for taking for time to post information and charts on this blog. I am thinking of starting a ‘cafe scientifique’ sort of affair in the UK, but on the topic of politics and economics. The mainstream media is so overwhelmingly biased I think people need a space to think about the underlying assumptions that govern political and economic decision making both at the individual and societal level. Your work will certainly feature.
“…did Jeroen Dijsselbloem make a mistake…?
Not in his doing his job, rather his real mistake is in doing his job based on a FLAWED system.
A sovereignty that is not a monetary sovereignty must over time remit all its wealth to the monetary sovereignty whose currency is used. Unless they are allowed to borrow (or ‘print )’at zero interest .
Why is it not recognized that the most powerful force in the universe ; compounding) as in compound interest is infinite. Prof. Michael Hudson ; “…. The Mathematics of Compound Interest A syndicate of less than one hundred American capitalists, if allowed to collect interest on their capital at a low rate and re-invest for 150 years or less, would at the end of that time own the earth and all real and personal property thereon. This is a simple mathematical proposition, capable of exact demonstration, and any one who doubts the truth of this statement may set all doubts at rest by computing compound interest on one and one-half billions of dollars for one hundred and fifty years, at five per cent per annum.
Either there’s parity between M0 and M1, and transitively this means every bank’s M1 is the same as any other’s, or there isn’t. Our present banking and monetary system is based on parity. Many problems would be solved if we removed that condition, so that M1 floated in value (relative to M0). For example it would be much easier to deflate monetary-financial bubbles if the banking system could simultaneously write off bad loans and cut deposits. The Cyprus debacle broke parity and left us in a mess, without moving to a sensible post-parity arrangement.
Presently in the Euro system we have nominal parity beween M0 and everyone’s M1, but de-facto risk and liquidity premiums against each bank’s M1. A million Euros in Laiki clearly isn’t the same thing as a million in Commerzbank, but it’s supposed to be for the system to work. If the risks are bundled by national boundaries, as per the initial Cyprus proposal, you have de-facto national M1. If the risks are held against each individual bank you have an unworkable mess where consumers are supposed to shop for safe banks as if they were funds, and inter-bank payments should in theory be bargained according to the perceived creditworthiness of each bank. Because nominal differs from de-facto value of M1, transfers rise in value when they enter a low-risk bank and fall in value in the other direction. This pumps money from the periphery to Germany. Of course M1 transfers are really transfers of liabilities, and if Greek or Cypriot or Portuguese M1 wasn’t worth its face value where it originated how is the liability worth its face value when it’s transferred to Germany? Clearing balances (TARGET2) aren’t going to be repaid, so accepting M1 transfers from the periphery is either remiss of Bundesbank officials or it’s a scam.
From where we are now I think the best course of action is to acknowledge the de-facto structure of the Euro system and make it official. We have a shared M0 called the Euro and it’s strictly controlled by the ECB as if it were gold. Let’s keep that for everyday cash and trade payments. National banking systems are clearly on their own, so let’s own up to that and convert each country’s M1 to a national denomination with a floating exchange rate to the Euro. We can call it NL-Euro, FR-Euro, GR-Euro and so on if we don’t want to revive expectations of seeing printed national currencies. Large national transactions such as house purchases, taxes, and salaries get denominated in national M1, as does debt. When we go to the cash machine to get Euros, or when shops put Euros in the bank, the exchange rate is applied. A little complicated, but it solves most problems. Greece devalues, Germany skyrockets, and we still have price transparency. The Euro should have been built like that in the first place.