We Did Warn You...

Professor Moorad Choudhry, Department of Mathematical Sciences, Brunel University
Wednesday, 20 Mar 2013 | 6:41 AM ET
the headquarters of the European Central Bank (ECB) in Frankfurt, Germany
Getty Images
the headquarters of the European Central Bank (ECB) in Frankfurt, Germany

Here was our headline just two weeks ago:

Euro crisis coming your way again very soon…

But who would have thought that what caused it would not be poor economic output stats, but rather a hamfisted piece of pure theft that proves once again, just as the creators of the euro project demonstrated back in the 1990s, that EU governments have a zero understanding of finance and what makes markets (read: human society) work.

Why do we have central bank lenders of last resort? Public-purse funded deposit guarantee schemes? To provide confidence in the system. People realized, a very long time ago, that banks are a lifeblood of societal development and a failing bank is very bad for said development hence (a) banks need to be run very prudently, and conservatively and (b) should a bank be inept or unlucky enough to fail, its depositors need to be protected.

We deposit our own money in a bank if we feel it is a safe and secure home for our cash. But just in case it happens to be managed by a bunch of incompetents, we know the government will back small savers, for example in the U.K. up to 85,000, if the bank fails.

Cyprus is technically bankrupt. For such a small economy this fact would raise maybe two column inches in the business section of the world's press. But it happens to be in the euro, so it can't go bankrupt. The bailout sum is trifling compared to the aggregate GDP of the euro zone, but euro political leaders wanted the country's bank liability holders to share the pain of the bailout, allegedly because much of the deposits are placed there for less-than-savory reasons.

But a tax on everyone? Even small depositors? Introduced after the fact, via a midnight raid on bank accounts?

It makes a nonsense of the euro zone deposit guarantee scheme and completely undermines the euro itself. Now we know what "whatever it takes" means when it comes to saving the euro – it means overnight you can find capital movement blocked, funds locked, and taxes imposed for no reason other than you happen to bank in a country that is now bankrupt. Why would anyone want to place euros in a bank that is within the borders of a country that is at risk of a euro bailout?

Slowly but surely the euro is unwinding. Everything every euro zone government and their hapless regulators talk about – greater regulation, banking union, stability facilities, government bailouts, ECB underwriting of sovereign debt – just prolongs the inevitable. In its current form the euro is not long-term viable.

One could kick out the outliers and preserve the euro as the currency of the hardcore rump – Germany, France, Benelux and possibly Finland. But this would cause so much operational, legal, and bank capital flight problems as to be impossible to contemplate. Better to simply unwind the whole project and overnight simply revert back to every country's own domestic currency.

But that would mean admitting that the whole euro project had been a complete mistake. A completely unnecessary, self-imposed taxpayer waste. And that would be like asking Tony Blair to admit invading Iraq was a tragic and unnecessary waste of British blood and treasure.

Politicians. Actually, we really don't get the ones we deserve…


Professor Moorad Choudhry is at the Department of Mathematical Sciences, Brunel University and author of The Principles of Banking (John Wiley & Sons Ltd 2012).