As is noted in the FT this morning:
Cypriot lawmakers have passed a bill that paves the way for capital controls. The legislation allows Cyprus's government to introduce limits on transfers of bank deposits and cash withdrawals. It gives considerable discretionary powers to the state. Neither the European Central Bank nor the European Commission prevented the move. Both deemed it necessary to avoid uncontrolled outflows during the renegotiation of the island's bailout deal. But the eurozone has now embarked on a process that endangers both the currency area and the single market.
The most important characteristic of a monetary union is the ability to move money — without any restrictions — from one bank to another in the currency area. With capital restrictions, the value of a euro in Cyprus is no longer worth the same as a euro held by any other bank in the eurozone. A euro in Nicosia cannot be used to buy goods in Frankfurt without limits. Effectively, it means that a Cypriot euro is not a euro any more.
That's true. And the circumstances make it seem as if this was a deeply retrograde move. According to the economic mantra it is, of course. That mantra says that capital must move wherever it will to maximise its return. The whole of the EU is built on that idea.
But that idea is wrong: if capital can roam as it will then a state cannot control its currency if it has one. Nor can it be in control of its interest rates. Or its tax revenues. Free roaming capital challenges the right of the state to manage its economy in the interests of those who democratically elected it.
And those who do vote undoubtedly lose out from the impact of free-roaming capital. When capital roams and by and large people don't the rate of return to capital increases and the rate of return to labour falls. If you want a simple explanation as to why the real wage rate has been frozen, near enough, for more than thirty years (the precise era of capital market freedom) whilst that of bankers, free-riding on the back of capital, has sky-rocketed that is it.
Capital controls are then to be welcomed. They are an essential control on the destructive power of capital.
If there had been capital controls there would have been no Cypriot crisis.
There would have been no banking crisis in 2008.
There would be, at most, a very small tax haven problem.
And I argue the world would be better off because much of the supposed growth in the world that capital freedom gave rise to has benefited a few and not the many, and more than that, it's helped destroy our environment on the way as anything and everything that can be traded has been.
The markets will say capital controls are a threat. They are right. Capital controls are a threat to the abuse permitted by unregulated markets, but for everyone else today might be a cautious step towards a fairer, more sustainable world.
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Well said Richard! Imposition (should be re-imposition) of capital controls will presumably now be blamed by the financial markets and neoliberal politicians for all the woes about to befall Cyprus. However, this was a normal part of life in Britain until Thatcher’s first act as PM to abolish them and a normal part of life in every other European country until more recently. The point is that so-called ‘free movement’ of capital (in addition to goods, services and labour) is a fundamental threat to the ability of democratic states to decide their own economic policies. It is a surrender to the financial markets and to the power of the ECB.
Agreed
So the Cypriots couldn’t buy loads of Bitcoins then skip over the border and cash them in? They can’t go on Second Life and buy lots of items with Euros then sell them for Linden pounds and then convert them abroad (or using a proxy from their front rooms) to other currencies? Actually in both examples the amswer is ‘probably not’ but I’ve got a feeling there’s going to be ways around capital controls now that weren’t there in the 70s.
“So the Cypriots couldn’t buy loads of Bitcoins then skip over the border and cash them in? They can’t go on Second Life and buy lots of items with Euros then sell them for Linden pounds and then convert them abroad (or using a proxy from their front rooms) to other currencies? Actually in both examples the amswer is ‘probably not’ but I’ve got a feeling there’s going to be ways around capital controls now that weren’t there in the 70s.”
Maybe there are, but the government could make it as hard as possible for them to do so, plus if you prosecute persistant offenders with tough sentences and enforce those rules rigorously, then there will be less incentive to do this.
Exchange controls DO seem a little draconian by today’s standards; only £50 could be taken out of the country and I believe this limit was increased to around £250 in the early 1970s, but £50 and £250 were quite large sums of money in their day. Of course sensible amounts need to be allowed out of the country, but we badly need to stem the outflow of capital from this country, particularly that which is used to speculate on the currency markets – trillions of pounds a week, which debases the currency.
Literally tens of trillions of pounds every year are being sucked out of this country to be used for speculation rather than investment in real jobs and infrastructure.
We need strong democratic capital controls now to stem this tide!
There is also the question, surely, of the rights of the individual vs those of the State. A balance surely needs to be struck — unless you’re advocating returning to the days when you could take only £30 abroad on holiday?
I am not
Equally I do not think there is an unfettered right to move cash
After all – who legitimises it and provides it with what can literally be called currency?
This role of the state carries collateral rights
That is indeed logical — to an extent. I suspect, though, that over time this will necessitate uncomfortable adjustments within the EU, if free movement of capital is restricted — likely corollary will be more restraint on freedom of labour, which (at least to a libertarian like me) is undesirable.
I’m enjoying reading The Courageous State — it arrived today from Amazon :0( . You even make economics (half) intelligible to a (former) mathematician — l absolutely agree about one equation in N unknowns — and when you throw in the emotional decisions of millions of people the future is indeed unknowable. As you say, puts a heavy premium on judgment.
Not sure that you explain how the slow motion train wreck of the 1970s arose. I remember them all too well — surely Mrs T was (at least initially) an improvement?
I too remember the 70s
I did not think Thatcher an improvement
I’ve never thought unemployment a price worth paying for dogma
But thanks for comments
Hear, hear! Our country’s finances were pretty stable for the best part of 30 years with capital and exchange contols. Ever since Thatcher abandoned them in 1980, there has only been slight respites from almost continuous recession.
Private debt has increased massively, growth has collapsed and wages buy less and less.
Capital controls are not a cure, but they are a massive step towards improving this country’s finances.
If capital controls are implemented, does this mean the cash in my account is mine or does government have first claim?
The cash in your account is not yours
The bank owes it to you – but that is not the same as saying it is yours
When you put cash in a bank you no longer have cash
You have an IOU from it
Does the government have a claim on that IOU before I do?
No
And capital controls mean the chance the bank can pay is increased
Would you support the UK leaving the European Union?
No
But I would support substantial reform
Can I ask a question? from your contacts within other Countries as part of the TJN, how much support would Capital Controls have elsewhere in the Eurozone (or indeed the wider EU? Curious if you have broached the subject with some of them?
I do not think that is an issue most in TJN address
I do, but that is why this site is not the same as TJN
Fair enough – just thought I’d ask. Under EU law Capital Controls can only imposed in ‘extraordinary circumstances’ – Neither sure how long they can be maintained for nor if regions like (for example) Estonia and Finland (Neither really Secrecy jurisdictions but very closely related) would be willing to impose them.
A shift from central bank, government bailout to one of bank making use of it’s own capital for investment and lending while keeping reserve has to be a good thing. Equity in any other corporation, never understand this difference with term for banks as capital.On banking reform this would be a move in the right direction, arguements of expense by banking lobby and media obsession with free market bias baffles me the freedom to increase share holder and private investment, lender is freely available.If we really want to get a real economy moving we must be taking a large amount of risk from public and placing back into private where banking is concerned. I know this is not exactly what the gist of your article is saying but feel a move back to transfer of risk from tax payer to bank and its share, bond holders must be a follow on to capital flight from state.
Haydn Wheeler
I’ve never been a big fan of globalisation, but this free movement of capital has surely benefited mainly the multi-nationals. Globalisation was created for the multinationals as was the WTO.
With this sort of capital control news and the ongoing crisis in Cyprus about to spread, I am curious that we have not seen discussion yet on derivatives and the threat they pose when things start to unwind. It is not clear to me how much exposure the big banks will eventually have in Cyprus, but my guess is that it may be significant. As with all things, time will tell.
I have mentioned counter-party risk
I admit to surprise that none has so far come into the open
An interesting point – Quite difficult to gauge (they’re called Secrecy jurisdictions for a reason). I’m surprised noone in the blogosphere has looked at this angle. Based on my knowledge the UK/US exposure might be moderate, rather than massive as Cyprus tended to be more popular with Russians and Southern Europeans but it is an interesting question.