JIM O'NEILL: The More They Try To Preserve The Euro, The More They Dismantle The Free Market For Goods

Jim O'Neill

Photo: Screenshot via Bloomberg TV

Experts around the world continue to sound off on the implications of the Cyprus bank bailout deal, which is expected to tax depositors by 6.5 per cent to 10 per cent.Like many others, Goldman Sachs’ Jim O’Neill also doesn’t like what’s going on.

From his latest Viewpoints note:

Cyprus Scary Move.
One fresh development that I read when I got off the plane on Saturday morning, has of course dominated all news since it emerged late Friday. As part of the agreed banking bailout, depositors in Cypriot banks are going to face a significant haircut, split between close to 10% for those above 100,000 euros and around 6.5% for those with less. This is a somewhat astonishing move, seemingly motivated yet again by what can be “done” through the German parliament, with little thought of contagion to the rest of the Euro-zone, and indeed perhaps the world. There are so many issues that arise from this, ranging from the fairness of penalising small savers, to whether this means investors can trust European politicians at all. I know some people in genuine business in Europe and Cyprus which have some of their cash deposits with Cypriot banks, and they are going to be indiscriminately hurt along with the foreign investors whom they want to penalise. While I am sure it will not set a precedent, I wouldn’t be surprised if markets gave a risk-premia to other global banking centres which are perceived as not being quite so stringent in attracting less desirable investments. Additionally, this would be similar for peripheral euro-area banks and markets, and it will require considerably more thought from Euro policymakers to ensure this doesn’t get out of control. I can’t help thinking that as much as they try to generally do things to preserve the Euro at all cost, ongoing policy decisions appear to be dismantling the underlying free market for cross-border goods and services within the euro-area.

Read his entire note at GoldmanSachs.com.

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