Are the Cypriots richer than the Germans?

ECB: who are the Eurozone’s poorest?

The European Central Bank’s (ECB) first Household Finance and Consumption Survey (HFCS) showed that median household wealth (i.e. how much a middle-income family owns minus the debts it owes) in Germany was €51,000 and in Cyprus €267,000. These numbers seem striking, especially in the light of the current crisis. But there are several caveats.

Firstly, on other metrics (such as median gross income), the survey shows both countries at a similar level of wealth. Secondly, home ownership levels vary considerably (Cyprus: 76.7%, Germany: 44%, mainly for cultural reasons), which has an important impact on the final numbers, especially as Cypriot “wealth” seems inflated by house prices. Thirdly, the prices of certain assets covered in the survey are “self-reported”, which might not be very accurate. Fourthly, other cultural specificities seem to explain these discrepancies: larger households with more adults (prevalent in Cyprus) are more likely to accumulate more wealth (especially through real estate) than smaller households (prevalent in Germany). Fifthly, German household wealth is still feeling the impact from German reunification and depressed house prices in East Germany. Finally, the survey does not account for “public wealth”: households in Cyprus may be accumulating wealth because they do not trust the Government will provide them with health and pensions.

So, who should pay for this mess?

Still, even after accounting for such caveats, the ECB survey sends a clear message: the Cypriots are richer than the Germans. These facts are useful as they discredit dangerous myths about “German domination of Europe” and other ridiculous non-sense messages seen in Cypriot demonstrations (“Merkel stole our savings!”).

The Cypriot crisis is far from being over, especially as it recently appeared Cyprus needs €23bn (more than the entire Cypriot GDP), and not the €17bn originally thought. The sheer scale of such needs come from the country’s oversized (700% of GDP) banking system, which is now essentially bankrupt. Cypriot depositors (especially those with less than €100,000 in their bank account) should thank Angela Merkel that they still have their savings, and in Euros rather than a devalued new currency (if you want to know how this feels, ask the Argentineans). If the Cypriots want someone to blame, they might like to take a look at their political and economic elites that have built this massive international offshore centre which it could in no way sustain on its own in troubled times. But as Cyprus is in the euro, its partners (including the poorer German taxpayers) need to help it out – were it only to avoid a euro collapse and the chaos that would come with it. This is not “fair”. So, looking at the future, what would be “fair”?

European solidarity: redefining the idea of justice

A fair idea of Justice would not reward Cyprus’ criminal business model (an unofficial money laundering centre for wealthy Russians). This would only create moral hazard among Eurozone members: “Invest in whatever you want to boost your economy (housing, finance…), and if it fails, don’t worry, Germany will foot the bill.” The Cyprus crisis highlights what is now a well-known shortcoming of the Eurozone: the lack of collective responsibility. The Maastricht criteria (deficit not more than 3% of GDP, debt 60% of GDP) were a shy attempt to encompass what should have always been one of the main pillars of the Eurozone: binding economic and fiscal policy constraints on member states. Building up a massive banking system which the State is unable to bailout on its own, as Cyprus did, is criminal: you enjoy the benefits but leave your Eurozone partners pay for the losses.

The main lesson from the Euro crisis is that you cannot share a currency without having minimum binding constraints. This is not about “domination of Europe” or a “Brussels Super-State”: it’s a question of fairness towards other European citizens. This should be the Eurozone’s idea of Justice: you are free as a State to do whatever you want, as long as it is clear it won’t have a negative impact on others. For now, since Cyprus’ (and others’) problems are here, Eurozone solidarity should be activated, but there is a price to pay: future political responsibility. This can come from the base, with the emergence of a new political class aware of previous mistakes, or will have to come from above, by giving the right to the European Commission to veto national budgets and economic policies.