I had planned an article on emerging austerity measures in Canada, but the unprecedented drama on Cyprus calls for a return to Nicosia. You can blame it all on the European Central Bank. The EU Observer has the story:

Cyprus is on the brink of bankruptcy and of becoming the first-ever country to leave the euro after the European Central Bank (ECB) issued an ultimatum on Thursday (21 March). In its statement, the ECB warned that it would turn off the tap of emergency funding to Cyprus’ banks on Monday if a rescue package is not agreed. Removing Cyprus’ emergency support could see the country’s two largest banks, Bank of Cyprus and Laiki, collapse within days.

This is pure-bred authoritarianism. But as I explained before, no one should be surprised that the Eurocrats – who from now on shall be known as Eurotarians – would take it to this level. They crushed the Greek economy and turned the Mediterranean nation into a wasteland of industrial poverty. They have brought Portugal to a simmer of social unrest, provoked a surge of separatism that could ultimately cause Spain to break apart, and they almost eradicated parliamentary democracy in Italy.

All to make the point that they, not the nation states, run economic policy. If the EU and the ECB want austerity in a  euro-zone country, then that country’s government better do exactly as they are told, or face the wrath of the Eurotarians.

The government of Cyprus is now learning first hand what this wrath means in all its ugly practice. The threat from the ECB to expel Cyprus from the euro zone is as nasty as it could be. Here is how it works:

1. The ECB wants the Cypriot government to seize up to ten percent of people’s bank deposits – the average “haircut” seems to be about eight percent.

2. If the Cypriot government refuses to comply, which they have done thus far, bank customers will in theory get to keep their deposits intact. However, in return for their non-compliance the Cypriot government will lose the ECB funds that would continue to keep the major banks in Cyprus at acceptable levels of liquidity.

3. To avoid bank defaults, Cyprus has turned to Russia for emergency loans. This would allow them to keep their banks afloat while avoiding a deposit confiscation.

4. The contacts between Nicosia and Moscow infuriated the Eurotarians in the EU and the ECB. Cyprus has all of a sudden showed that the ECB is not the only circus in town. But instead of sitting down, negotiating and recognizing Cyprus as a business partner, the ECB slams a nuclear bomb on the table and demands full and unabridged submission from Nicosia.

5. The ECB’s threat to kick Cyprus out of the euro zone is diabolic. It would force the Cypriots to reinstate their national currency, a move that would come with great currency risks. The ECB is calculating that the uncertainty of a currency change and the potential losses would be a more bitter pill to swallow for bank clients and lawmakers in Cyprus than the confiscation of deposits.

At the end of the day – that would be Monday – I don’t think the ECB is going to act on its threat to hurl Cyprus out of the euro zone. As the EU Observer story reports, others agree:

Carston Brezki, senior economist at ING, described the ECB’s move as a “gun at the head of Cyprus.” But he expressed doubt if the ECB would really switch off Cyprus’ financial life support. “It is hard to imagine that the ECB would really be willing to be the one to pull the trigger,” he noted.

It is going to be a close call, because both Mr. Brezki and I are probably under-estimating the complete arrogance that has engulfed the ECB executive offices. Nevertheless, the threat is going to have tangible effects, one being that the Cypriot government is working overtime to find an alternative to bank-deposit confiscation. EU Observer again:

The Cypriot government of president Nicos Anastasiades is now scrambling for a Plan B to put to the eurozone, involving alternative ways to raise the €6 billion contribution on which the eurozone’s €10 billion bailout package is conditioned. Using the island’s natural gas reserves, pension funds or state-owned assets as collateral have all been mooted as possible means to raise the cash. A set of bills were tabled yesterday in Nicosia, including plans to create a state investment fund to raise Cyprus’ contribution. The Cypriot parliament is also expected to vote on legislation to impose capital controls restricting the amount of money customers can take out of their bank accounts when, or if, they reopen next week. … Meanwhile, finance minister Michalis Saris will remain in Moscow for a third day of talks with Anton Siluanov, his Russian counterpart.

If the Cypriots call the ECB’s bluff they may still make a deal with the Russians. It would give them the “best” combination of two options: they get to stay in the euro zone, which makes them attractive for offshore investors from Russia. Currently, Russians own 23 percent of all bank deposits in Cyprus, a share that could easily grow with more deals between Nicosia and Moscow. At the same time, a loan from Russia to replace ECB funds would get Cyprus out from under the austerity boot that is currently hanging like a dark, ominous cloud over the island, just above the even darker, even more ominous threat of bank-deposit confiscations. A Russian loan would clear the Cypriot skies completely.

The big question is, again, how delusionally arrogant the Eurotarians at the ECB actually turn out to be. Again, I doubt they will force Cyprus out of the euro zone – somewhere, someone within the inner circles of the EU should know that some countries would actually like to leave the euro zone. They should be able to tell the ECB that a Cyprus exit would embolden euro-skeptics in, e.g., Greece, Spain and Italy.

Then again, allowing Cyprus to stay in without implementing the plan to seize bank deposits has its own consequences for the Eurotarians. It would show that they are, at least to some degree, a bunch of paper tigers. It would also stop the first test run of this new form of tax: as I explained a couple of days ago, the plan to seize bank deposits has widespread support among euro-zone governments. The reason for this is that they see it as a new form of taxation, and they need a live-size test run, an example they can refer to and say “it’s been done before, don’t worry, it didn’t hurt people in Cyprus, just lay still and allow us to take a few pints of your blood”.

One thing is clear, though. With its threat to kick Cyprus out for not seizing bank deposits, the ECB has put its fangs of totalitarianism on full display. From now on, nobody should be in any doubt that the entire EU project, as Nigel Farage says, is fundamentally anti-democratic.

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