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The implications for the Eurozone of taxing small depositors in Cyprus

Dr Neophytos Loizides, an expert in Cypriot politics at the University, has suggested that any move to tax small depositors in Cyprus could have major ramifications for the stability of the Eurozone.

Dr Loizides said: 'The Eurozone finance ministers’ decision in the early hours of last Saturday created a lose-lose situation. The EU has backed down from its commitment to protect small depositors while Cyprus has lost its most important industry: international banking, which is essential in repaying future loans. It is as if Germany was being forced to abandon its auto industry.

‘But the implications are equally problematic with regards to foreign depositors. The decision by European finance ministers and the IMF was intended to target primarily Russian deposits in the island. It was driven by populism in certain European countries portraying non-EU savers, who trusted the guarantees of Eurozone ministers, as ‘mafia bosses and oligarchs’. It seems we have a Europe where anything people say about Russia (and non-EU others) can become conventional wisdom without much evidence.

‘However, the decision was unnecessary because Cyprus had already agreed to EU demands to address money laundry issues, if any exist. More importantly, recently discovered natural gas reserves around the island could have provided the guarantees to repay its IMF/EU loans.

‘If Cyprus agrees to tax foreign depositors, Russia will respond in kind with reprisals on the Cyprus problem. If Cyprus chooses not to tax Russians, Germany is threatening to let the island’s economy go bankrupt. It's an unfortunate geopolitical game played on an already divided island.

‘Ironically, the ruling party of Nikos Anastasiades historically believed in a ‘federal Cyprus within a federal Europe’. His presidential campaign last month emphasised how the EU could help reunite the two communities. He was elected because of his EU vision but, with this bailout plan, the Greek Cypriot public will hardly trust European leaders again. The next few days will show whether Europe has lost a trusted partner in bringing peace in its region and stability in the Eurozone.’

Dr Loizides, of the University's School of Politics and international Relations, is an expert on international mediations and negotiations. His recent research focus is on party politics in Cyprus and how domestic political systems shape international negotiations.


Story published at 1:57pm 21 March 2013

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Last Updated: 12/06/2013