Remarks by members of the European Union's elite suggesting that banking deposit seizures may become standard practice appear to have heightened the risk of a European bank run and perhaps even a catastrophic collapse of the euro. Any threat to the euro is a threat to the European public's conception of the Union's manifest destiny. As such, I believe members of the EU elite may be purposefully leveraging the crisis to push for a centralized European banking system to cement the political framework of an EU superstate.
Don't be fooled by the haphazard developments of the ongoing eurozone crisis; anyone with an economics background can see how this crisis will broadly play out. But rather than pursue policies to restore fiscal sanity, the EU leadership has made moves to continue its policy of the past two decades: bring as many Europeans as possible into the sphere of a centralized EU superstate. Under the pretense of democracy, the EU has expanded to 27 member nations, mostly through democratic referendums (though not without considerable backlash from wealthier, northern European nations). Some may wonder why so many countries would yield their sovereignty to a remote body of bureaucrats in Brussels.
The truth is that many of these countries (especially the ones on the periphery of Europe, with relatively little experience with democracy) received vast so-called "development" funds upon joining the EU, mostly provided by northern European nations like Germany, Great Britain, and the Netherlands. The German Constitutional Court referred repeatedly to the "democratic deficit" within the EU even as membership grew, and last year it urged the German government to make German taxpayers increasingly liable for the economic shortcomings of fellow member states.
This is unsurprising, given the fact the German citizens never even had a referendum on the EU constitution. They are thus more subjects than citizens of the EU.
When it came to the euro, Germany only accepted the currency provided it was run as soundly as their steadfast Deutsche Mark. While the euro did quickly prove weaker than the Deutsche Mark, Germans were somewhat assuaged by the boost to their exports. However, for countries like Portugal, Italy, Spain, or Greece that had been used to endless currency devaluations, the relative strength of the euro highlighted severe problems.
For years, member-states papered over these problems by borrowing money based upon the credit rating of the EU. But some of the EU banks that bought government debt became far too over-leveraged, so that in the financial meltdown of 2007-08, both European central banks and their host governments began to suffer from the toxic debt. This has continued as a serial crisis in the intervening years, and with each subsequent incident, the European Central Bank (ECB) stepped in at the eleventh hour with a solution that strengthened its grip over not only the eurozone, but every member-state of the European Union.
Ultimately, it appears the EU would like a controlling influence over the Treasuries and taxpayers of all member-states within its purview. To the frustration of the EU elite, citizens of the productive northern member-states have repeatedly resisted this subjugation. In my home country, for example, Prime Minister David Cameron has long grappled with an unhappy parliament clamoring for a referendum on EU membership.
This struggle seemed to be turning against the power-mad of Brussels… then along came Cyprus. What better way to unite the EU than a potentially catastrophic collapse of the euro?
Cyprus is small, but it has a banking system nearly five times the size of its economy. Many of its deposits are suspected of being owned by the Russian mafia, and so losing 60-100% of these deposits would cause little resentment outside Russia. However, the simple fact that such a seizure could be approved by central banks has engendered a fear of bank runs throughout Europe.
In the midst of all this, the world was astounded when Jeroen Dijsselbloem, president of the Eurogroup consortium of finance ministers, declared publicly that the Cypriot solution of making depositors and bank bondholders liable would become a "template" for future bank bailouts. After a quick and fierce backlash, Dijsselbloem officially back-peddled. But the damage was done.
In spite of Dijsselbloem's recantation, a significant amount of smart money was scared out of eurozone debt. While the Cypriot crisis appears to have been held in check, a lot of capital was transferred into US dollars and banks. You see, today, major bank runs happen for the most part not on the street, but electronically and often within minutes. They attract minimal public attention, are easily kept quiet, and the aggregate amounts transferred are known only to finance ministries and central banks.
The true magnitude of any run on Cypriot or eurozone banks is hard for outsiders to clearly ascertain. This can be used as a major weapon in cajoling EU leaders into accepting greater banking "unity" in both the eurozone and the greater EU.
Should the Cypriot crisis prove an inadequate threat to further centralize the EU banking system, then there are a number of brewing crises that might do the trick. Both Slovenia and Luxembourg have disturbingly vulnerable banking sectors worth about 130% and 2,200% of GDP respectively. And then there's the recent report from the IMF showing major selling of euros by central banks in emerging markets, where euro holdings have dropped to 24% from 31% in 2009.
All of these threats to the euro have two major impacts. In the short-term, they boost the US dollar in spite of its shockingly weak fundamentals. In the bigger picture, they become a cudgel to beat the last vestiges of sovereignty from the member-states of the EU.
In the mid- to long-term, both reserve currencies are risking losing their status to alternatives - notably gold and silver.
John Browne is a Senior Economic Consultant to Euro Pacific Capital. Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.
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