EU - Have they just scored an own goal?

This weekend's announcement by the EU, whereby they have imposed a haircut on the bank depositors of Cyprus, seems to me to be at first sight to be a massive own goal. Of course I accept I may be wrong, but having played a pretty good game in very difficult circumstances since the start of the European Sovereign Debt Crisis, it seems like they may have started something which puts everything before it at risk.

On one hand I think can understand what has happened to drive this move. - The people of the European creditor nations are 'fed-up' with the recent Status Quo: That is using the proceeds of their hard work, for which they pay their full taxes on, to bail out the profligate debtor nations, who’s workers receive generous state support for doing relatively less work, and then hardly paying any taxes. Then as if to make matters worse, they receive nothing but scorn and vitriol for bailing them out. - Political forces in the European Creditor Nations, or more to the point Germany, though influenced by other nations - in particular Finland, are re-shaping and this required a tougher response for this bail-out. - Cyprus has enabled the politicians a perfect opportunity: A small nation with little real political clout and where political strife and popular anger may not make the television 'Breaking News' bulletins as often or with such high profile as would be the case of other larger countries. - Though this could easily also be seen as a cowardly move, picking on a small nation with little political clout to appease popular opinion.  

However, in doing so the EU have possibly started something far bigger; a fire-storm, that could easily get out of control and undermine banks across the Eurozone, particularly within the debtor nations which have thus far they have been shoring up these banks. At the same time they are putting their own credibility at stake, and possibly unleashing uncontrollable political forces.
Picture the scene across any nation now that may at any time demand or require a bank bailout or a further bank bailout. What are prudent savers going to be doing? I am sure they are sensible enough not to be running to the bank to be withdrawing deposits, however who knows? Enemies of the Eurozone will be rushing to capitalise on this story, scaremongering will be ripe, it only takes a few photos or TV shots of queues building up outside banks to start a rush. - Perhaps it will not be a rush however, this does not mean it is not happening: Large depositors may be quietly moving their money from local banks to safer havens, or even solid shiny commodities that they can leave safely stored in their name somewhere. - This will not be purely a knee-jerk reaction, they will almost certainly be thinking that if this gets out of control there are 1 of 2 options open to the EU. - 1 is to re-consider this weekend’s Cyprus decision, which would seem the obvious step. However the EU’s credibility will be massively questioned, and whilst it seems easy to criticise this move as 'Stupid', the truth is this is a response to shifting political forces which played a part in shaping this, and it would be interesting to see how much room there is for a re-think.  2 - Is for it continue, if however suddenly huge cross-borders capital movements suddenly start becoming an issue, then I doubt that even the SNB could avert EURCHF diving below 1.2000 without some form of capital controls. - There are many other potential outcomes to this, but I do not want to even go there at this stage.

The initial response this morning in markets has been understandable, though perhaps not as dramatic as perhaps it could have been. - EURO lower on all crosses, but just back to last week’s levels, and off the worst levels as I write. Gold up, stocks down, bank shares somewhere around 3 – 4% lower.  At the moment, the market has purely re-marked prices, and is now in a wait and see mode……. Perhaps I am being more pessimistic than necessary, but, I am not typically a doom-monger, my cup tends to be half-full, and I certainly do not subscribe to Zero Hedge’s ‘the world is about to end’ doctrine. – But I must admit, this weekend’s events may just be the little grain of sand, which drops on to John Mauldin’s insecure mountain of sand, which triggers a much bigger collapse in the whole pile.

"Grunge Flag Of Cyprus" image courtesy of "creativedoxfoto" at FreeDigitalPhotos.net.
"Euro Sinking In Sea" image courtesy of "Stuart Miles"  at FreeDigitalPhotos.net.