Euro crisis: Why a Cyprus bailout must be seen as 'fair'

As Europe tackles its latest euro crisis, a Cyprus bailout deal must follow the path of being perceived as 'fair.' A tax on small-time savers isn't seen that way.

The Monitor's View

For three years, Europe has tried to fix the eurozone debt crisis country by country, from Greece to Ireland to Italy to Spain. Each time leaders try to assign the blame, the burdens, and the benefits according to what they perceive to be “fair.”

Now it is Cyprus that needs fixing – and quickly. The island nation’s banks are closed while its politicians deal with tough terms for a bailout. World markets are jittery.

This time, however, the task of fixing this latest crisis in Europe has run into a massive perception of unfairness. Just how well European and international leaders balance the competing notions of what’s fair could determine how fast the Continent’s economy recovers.

The main issue for most Cypriots is that the proposed rescue plan calls for a tax on bank depositors as a way to restore the financial system. For small-scale savers, the tax would violate a government guarantee that no deposits up to €100,000 would ever be lost, similar to the FDIC insurance in the United States. A promise would be broken as this one-time tax would diminish the amount of each person’s savings.

This tax on savings would extend to those with savings over the €100,000  limit – an even heftier tax. Many of those depositors are Russians who have long used the secret banking culture on Cyprus to park their money – some of it gained as a result of corruption. That flow of foreign money into Cyprus has given the small country an outsized and lopsided banking system that is now teetering on collapse. Taxpayers in Europe do not want to bail out these Russians and thus insist on a depositor’s tax.

To make the solution for Cyprus even more difficult, some of the Russian depositors have smartly spread their savings across several bank accounts to stay under the €100,000 guarantee.

For the euro crisis handlers, assigning blame, burden, and benefits, to say the least, isn’t easy.

This problem is a sticky  wicket of ethics for the European Union and its hopes of being seen as fair. Sorting out the issues in emergency mode and behind closed doors makes it even more difficult for citizens to perceive fairness.

Defining what’s fair in many circumstances can be perplexing, and yet the perception of fairness is often essential to resolving a problem. In a 2011 study across eight states by the Urban Institute for the US Department of Justice, the best indicator of whether a drug offender would stay away from crime was whether he or she perceived the presiding judge as fair, attentive, and respectful. In other words, the positive attributes of the judicial system were reflected back by positive outcomes for offenders.

In business, too, many companies have adopted a style of “service leadership” in which bosses create a climate of support for workers that is then reciprocated or passed on to others, such as customers.

This you-sow-what-you-reap method of creating long-term solutions must now apply to the Cyprus crisis – despite the complex issues. Forcing an “unfair” solution on an entire nation may end the crisis for a short while. But perceptions of unfairness won’t create the stability that the eurozone nations seek.