Imposing capital controls would be a historic mistake for Cyprus and the euro zone – even worse than the crass idea of taxing uninsured deposits. Non-cash transactions would be limited, while withdrawals from cash machines would be rationed.
Cyprus’ deposit grab sets a bad precedent. Money had to be found to prevent its financial system collapsing. But imposing a 6.75 percent tax on insured deposits – or even the 3 percent being discussed on Monday morning – is a type of legalised bank robbery. Cyprus should instead impose a bigger tax on uninsured deposits and not touch small savers.
One knee-jerk reaction to Italy’s shock election was to worry about contagion to Spain. As Rome’s bond yields shot up last Tuesday, Madrid’s were dragged up in sympathy. These are the two troubled big beasts of the euro zone periphery and an explosion in either of them could destroy the single currency.
Can the Italians be serious? That is likely to be the reaction of financial markets and the country’s euro zone partners as they ponder a disastrous election result, which could reignite the euro crisis. More than half of those who voted chose one of two comedians: Beppe Grillo, who really is a stand-up comic; and Silvio Berlusconi, who drove Italy to the edge of the abyss when he was last prime minister in 2011. Both are anti-euro populists.
The Bundesbank isn’t mad. In a world where it is increasingly fashionable to call for central banks to print money, the German central bank is one of the last bastions of orthodoxy. Although its stance is extreme, it is a useful antidote to the theory that easy money is a cost-free cure to economic ills.