The euro crisis quietly entered -- and left -- a new and destructive phase, all in the space of a few hours, on Monday afternoon. All it took was a single interview and a single retraction.
Eurogroup president (and Dutch finance minister) Jeroen Dijsselbloem shocked markets when he told Reuters that the Cypriot bail-in -- which was supposed to be a "very special" case that wiped out uninsured bank depositors of €100,000 or more -- would actually be a "template" for future bank rescues. In other words, if you have more than €100,000 in a euro-bank: "RUN!" This promptly sent euro-bank stocks tumbling, and Dijsselbloem scrambling to reverse himself.
Dijsselbloem meant Cyprus wasn't a template when he called it a template. Get it?
This short-lived plan was a reasonable idea done in the least reasonable way. The reasonable idea was making bank creditors, rather than taxpayers, pick up the costs of bank rescues. In practice, that means bank shareholders are in line for the first hit, bank bondholders for the second hit, and uninsured deposits the third hit. Insured deposits and taxpayers are spared.
But there's a problem. If shareholders and bondholders and uninsured depositors know they might get wiped out, they'll run. It was just such a run after Lehman failed -- the one big time bondholders got whacked -- that nearly gave the financial system a coronary.
The only way to make bank creditors pay for bank bail-ins without setting off a bank run is to do them all at once. Government officials need to stress test all the banks, and then announce which of them just need to raise more capital, which of them need to convert bondholders to shareholders, and which of them need to haircut uninsured depositors. And then that's it. The government announces that there won't be any more bail-ins. Bank bondholders and uninsured depositors are safe from that point on.
But a continental bank holiday and restructuring wasn't on the agenda. A continental bank run was. Why would anybody keep more than €100,000 in a Greek or a Spanish or an Italian bank? They wouldn't. That money will leave weak euro sovereigns and flow to strong euro sovereigns. In other words, it will go from Spanish banks to German ones. And that will only make Spanish banks (and Greek and Italian and even French ones) more dependent on "emergency liquidity assistance" (ELA) loans okay'd by the European Central Bank (ECB).
This last point is crucial. Southern European banks could survive a bank run -- but only as long as the ECB filled the gap of fleeing depositors. Of course, the ECB keeping banks afloat while creditors run would defeat the purpose of making creditors pay. There wouldn't be many left to do so. At least besides the ECB, which doesn't take losses. In this case, ECB intervention would only put taxpayers back on the hook for bailouts. It wouldn't be coming.
The Dijsselbloem plan was really a plan for the end of the euro. There only would have been one way to stop the inevitable bank runs: capital controls. In other words, people with money in southern Europe wouldn't be allowed to move it across national borders. But what good is the euro if you can only use Spanish euros in Spain and Italian euros in Italy and French euros in France? As Tyler Cowen points out, capital-controlled euros would be worth less than other euros. You might as well call them pesetas and lira and francs. At least then those countries would regain control over their monetary policies, and have a chance at ending their deep slumps.
In short, the Dijsselbloem plan was a plan to bankrupt southern European banks and make southern European euros worth less than northern European euros. In case you were wondering, this is the farce stage of the euro tragedy.
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Matthew O'Brien is a former senior associate editor at The Atlantic.