The EU will fall apart according to the USA

desmond_lachman_2Lachman Desmond thinks that the developments in Cyprus already have very serious implications not simply for Cyprus but for the rest of the euro zone. The whole euro zone is impacted and it will have implications for central and Eastern Europe.

Zentuccio: Do you have any concerns regarding Cyprus and Hungary? Central Europe?
Lachman Desmond: I think that the developments in Cyprus already have very serious implications not simply for Cyprus but for the rest of the euro zone. The whole euro zone is impacted and it will have implications for central and Eastern Europe. What is of particular concern is the possession of a tax on bank deposits. That tax was not confined to large depositors of over EUR 100,000 but for also those who have less than EUR 100,000. The concern is that it is in violation of the guarantee that was supposed to be given to small depositors. One of the messages is that depositors cannot feel safe in other countries. That has the risk of deepening this euro crisis.

Are you okay with the measure if they do not touch deposits of under EUR 100,000?
The concern would be somewhat softened. It really looks like they are going to tax smaller deposits as well. We are in a much worse position than we were in Friday before they announced.

Do you think that from now on nobody can be sure of their deposits?
Deposits of over EUR 100,000 are not insured. That is fine. I draw a distinction between deposits of over EUR 100,000 and less than EUR 100,000. This is a huge mistake on part of the Europeans to even have the idea that this could be done.

How would you deal with Cyprus issue?
The point is that this very poor decision was the results of different political forces. So for example the Germans for domestic political reasons were not prepared to just write the check to this country. From a political point of view the Germans were not willing to write checks for Russian depositors to keep Cyprus afloat. Cyprus did not want to have a tax beyond 10% on large deposits so they had to raise the money on small depositors. What I would have done is I would propose that if you have to raise the money from bank deposits what they should have done is instead of having a 10% tax on bank deposits above EUR 100,000 the tax should have been 15% or 20% or whatever the number is. That would have been large enough. What I do not understand from a political point of you is that taxing small deposits is a losing proposition. It is no surprise that there is a huge political backlash.

Do you think Turkey would like to profit from this situation?
I think that the Merkel would be concerned what Cyprus would do to the rest of the Union. I think they would like to help Cyprus in a way they would not cause trouble in the euro zone. I would see Cyprus from the German prospective as much like Greece. They did not want to allow Greece to fail because if Greece fails it could imperil the whole euro project. I think they would be looking at Cyprus the same kind of way. They take into account what it would do to the rest of the euro zone. The head of the ECB has been very careful to say that Cyprus might be a tiny little economy but what happens in Cyprus could affect the rest of the euro zone.