Well that’s a relief! The initial leaked documentation detailing how capital controls will work in Cyprus says they will only be temporary.
Of course, were one to look through history at episodes of international monetary breakdown, you’ll find that most of the seminal, permanent measures which brought economic systems to an end were also described as temporary.
Iceland’s capital controls, for instance, were “temporary” when first introduced in 2008. They are still in place, “temporarily”, five years later. When Britain left the Exchange Rate Mechanism in 1992 it was described by the Chancellor as a “temporary” measure. Indeed, as far as many were concerned, when in 1971 Richard Nixon closed the gold window – a momentous moment that brought the Bretton Woods system to an end and landed us in a world of floating exchange rates – it was branded a “temporary suspension” as well.
And this is before one gets to the hackneyed example of income taxes which, when William Pitt the Younger introduced them in the UK in 1799, were supposed to be temporary too.
In other words, in economics it pays to be sceptical when someone insists something is only temporary. And, as I laid out in some detail in a previous post, if Cyprus has permanent capital controls, it will permanently cease to be a euro member.
So we will watch with interest and some scepticism Cyprus’s efforts to try to dismantle the controls in a week’s time. Particularly since we now know they will be even less subtle, even less avoidable, than was anticipated: a ban on taking €1,000 cash out of the country; a block on cheques being cashed unless they’re intra-branch; limits on credit card spending overseas. It’s clear that the country is constructing an iron ring around its borders.
And, clearly, a euro in Cyprus won’t be worth the same as in other euro members.
Of all the feats Cyprus will have to surmount in the coming months and years to escape from its current predicament, taking down these “temporary” capital controls will be among the most difficult.
And, if and when it fails to dismantle the controls and has to leave the euro, I’m sure that will be “temporary” too.