Cyprus: tax haven for the rich, poverty for the rest

Printer-friendly versionSend by email

On the morning of Saturday 16 March, the radio informed the million inhabitants of the island of Cyprus that a European aid plan had been agreed for the country that included the introduction of a tax of 6.75% on bank deposits up to €100,000 and 9.9% for deposits above that amount. Obviously, everyone rushed to the banks to withdraw their money. In vain! Banks and markets were closed, withdrawals from ATMs were limited. For more than a week, the country was at a standstill, with the population not knowing what tomorrow would bring. Finally, after many twists and turns (a rejection of the European plan in the Cypriot parliament, many official, behind-the-scenes negotiations...), the tax targeting the small investors was cancelled, but instead, accounts of more than €100,000 were hit harder (eg those of the Bank of Cyprus - the first bank in the country – would lose amounts between 30 and 40%) and the second largest bank, Laiki Bank, was declared bankrupt.

We have had no end of explanations to explain this disaster. ‘It’s Merkel’s fault!’ ‘It’s the fault of the European Union!’ ‘It’s the fault of the IMF!’ That’s what the victims (and those who showed solidarity with the families of workers affected) were told. And ‘It is the fault of irresponsible Cypriots!’ ‘It is the fault of international capital laundering its money!’ ‘It’s a healthy and necessary fight against harmful excesses of the financial world!’ These explanations for the catastrophic state of the Cypriot economy were offered elsewhere.

In reality, all these explanations are not only crude and pathetic lies, they are particularly poisonous for working class consciousness and struggles because accepting them would imply that:

  • either the fight is against Merkel, the EU or the IMF;
  • or the fight is against ‘irresponsible leaders’, ‘corrupt financiers’ or ‘capitalist excess’.

In either case, the anger and reflection are deflected away from what is the real root of the current dramatic situation: capitalism. And worse! By blaming only certain parties (this individual, that government or that institution), by making believe that a more humane form of capitalism is possible, the bourgeoisie ultimately leads the exploited into defending the system that is attacking it!

To support its propaganda, the bourgeoisie draws on the appearance of things, on what seems obvious, on basic common sense. Or, in the words of Albert Einstein, “What we call common sense is actually all the ideas we have been taught up to the age of 18” (and even later, we should add). So, we must make a real effort theoretically to go beyond appearances to discover the real cause of the current downturn that’s not just in Cyprus but all over the world.

The history of Cyprus

Owing to its geographical position, Cyprus has always been a highly coveted and fought over transit point1. So the island was one of the first points of contact between East and West in prehistoric times. It was independent in the Middle Ages and it became successively the flagship for the republics of Genoa and Venice. In 1571, Cyprus came under Ottoman domination.

There then followed a long period of decline until, in the nineteenth century, a new master, Great Britain, arrived. Cyprus was added to Gibraltar and Malta on the maritime route leading to Egypt and the Levant. It took advantage of this, waking from its torpor, but without really making a big leap forward. It gained its ‘independence’ in 1960.

In 1963 and 1964, the Turkish community was the victim of atrocities. On 6 August 1964 the Turkish air force bombed Tillyria. In the context of the Cold War when Americans forces were based in the area of their Turkish and Iranian or Iraqi allies, there could be no question of letting Cyprus become the Cuba of the Mediterranean.

Washington and Ankara, fearing a Soviet intervention on the island, agreed to the unification of Cyprus with Greece, provided that the Turkish army had a base there the same size as the English bases. But against all odds, President Makarios, who had, in the 1950s, defended the idea of enosis, the union of Greece and Cyprus, but had become a staunch defender of the independence of his country, refused to play ball. The Turkish army intervened, communities were uprooted and populations relocated. Shortly afterwards, the United States, worried about the weakness of Greece and always fearing a Russian intervention, colluded in deposing the monarchy, establishing a military dictatorship on 21 April 1967.

However, these same generals, supporters of a Cyprus united with Greece, did not go along with Makarios’s desire for independence and, moreover, the Americans didn’t trust him, fearing that he took his reputation as the ‘Castro of the Mediterranean’ too seriously. On 15 July 1974, the ‘colonels’, with no opposition from Makarios, launched a coup d’etat. Then, fearing Cyprus’s integration with Greece, Turkey landed 7,000 soldiers on the island on 20 July to ‘protect’ the Muslim community. The Turks wanted to have two geographically and ethnically distinct states, united under the authority of a federal government with limited powers, and organised the removal of the Christians to the south and the Muslims to the north. The southern Christian part claimed to represent the whole of Cyprus and was recognised by the international community. The northern Muslim part, took the step, in 1983, of declaring itself independent, but the international authorities consistently ignored this decision.

Thus, since 1989, Cyprus is the last European country with a dividing line and a capital divided by a wall. Cyprus would ‘benefit’ from another regional conflict, the Lebanon war. Lebanese capital, fleeing the war-torn country, invested in and dramatically transformed the southern region for a decade. When peace returned to Lebanon, Cyprus was fearful of a decline in foreign investment, but Soviet Perestroika and the revival of the Russian economy would provide new financial support.

First lesson: national economy, a product of the world market

According to some journalists and PhDs in economics, Cyprus’s ‘delicate’ position is due to the irresponsibility of its leaders (and therefore ‘the people who elected them’) that have transformed the island, out of pure greed, into a place for massive speculation and even into a giant laundry room for dubious capital, especially that from Russia. In fact, the brief history of this country shows the extent to which the current situation is the product of the history of world trade and imperialism.

With the Turkish invasion of 1974, some sectors and whole parts of the national economy were lost. With no agriculture, with no heavy industry, the Cypriot bourgeoisie had to find a new sector for capital accumulation, or perish. But which one? As a former colony, Cyprus had had a close historical relationship with Britain for over a century: English, for Cyprus, is still the lingua franca and the language used in education. It is used within and between its major institutions. This British culture is surely what explains why Cyprus spends 7% of its productive capacity on education, putting the country in the top three of the European Union. Lots of Cypriots go to study in universities in the UK or North America: nearly 4 out of 5 Cypriots study outside their island. And 47% have a graduate degree, the highest rate in the EU. Cypriots are an educated and mobile people. This is why they are uniquely positioned to provide accounting, banking and legal services of a high quality. In addition, they are members of the EU with all the benefits that come with the free flow of payments, capital and services, and have an exchange taxation treaty with Russia and low taxes.

Adding all this together, it explains its success hitherto as a European centre for trade and services. ‘Yes, but to then become a tax haven!’ exclaim all those who refuse to see that it’s not this or that leader, this or that financier who is in the dock but the world capitalist system as a whole. If tourism, chartering sea vessels and banking have gained an excessive weight in relation to the real economy of this small island, if all the banking facilities and charges have been introduced to encourage the development of foreign financial investments, the economy would no doubt have collapsed without it. If this tax haven had not been created, its current bankruptcy would have been avoided because ... it would have occurred much earlier!

Moreover, the entire global economy actually needs this ‘haven’. Since 1967, capitalism has suffered recession after recession, crisis after crisis. The real economy, industry, has become more and more lethargic. Investing in new plant is more and more risky; investments can be lost. That is why today, many investors are putting their money into loans to states at rates that are zero or negative. In other words, they have nothing to gain! Why? Because by investing elsewhere, they risk losing everything. This means that finding a profitable investment has now become incredibly difficult. Speculative bubbles (property, stock exchanges …), like sifting money away into the countless tax havens, are a necessary product of the global economic crisis of capitalism. Otherwise, the Cypriot bourgeoisie, like all others, would be unable to make a profit from its capital. This explains the existence of speculation.

But why is the world dotted with major financial centres which respect no law other than the lack of transparency? Is this not, on this occasion, the product of the immorality of the investors and their insatiable greed for money? Well no! Again, this is only how it looks on the surface. So let’s dig down a little.

With the real and legal economy being less and less profitable and more and more risky because of the severity of the global economic crisis, financial profits in capitalism tend to come increasingly from illegal activities. Drugs, arms trafficking, prostitution, trafficking in women and even children are all now an important part of the global economy. All funds invested in these obnoxious and inhuman activities must seem to come from out of nowhere and the mass of profits that they bring must be ‘laundered’ before being put back, when needed, into circulation. But capitalism’s greed doesn’t end there. All over the planet there are millions of human beings labouring in workshops manufacturing flasks or shoes; a whole multitude of workers reduced to slavery with no ‘legal’ sanction.

This shameful economy, this hidden economy, is a source of huge profits that get channelled via thousands of invisible links to the largest banks and financial institutions in the world. All the profits from the blood of the exploited must be first of all be carefully hidden and after long cycles of ‘cleansing’ in laundries like Cyprus, then brought back into general circulation, in the banks on the high streets or in the official stock markets. At this level, the ‘skulduggery’ of capital holds no bounds. A very large part of global speculation is therefore placed out of view, outside of any regulation, any law, or any control. This hidden and illegal ‘black’ economy has spread throughout the capitalist economy.

Today, leaders complain when states are facing bankruptcy; because all of the money that is going untaxed. But this also plays a particularly important role in bolstering profits, in the way a drug addict needs a regular supply of drugs. This is why all the slogans such as ‘Clean up capitalism!’ ‘Close the tax havens!’ ‘Impose stringent regulation!’... are nothing but expressions of outrage! Capitalism is sick, its real economy is not running smoothly; to survive, it is forced to more openly cheat its own laws. The rhetoric of the political leaders on the need for ‘economic morality’ is therefore a bluff! Neither Cyprus, nor Luxembourg, and even less the City of London is actually going to be forced to stop their speculative activity

Second lesson: major imperialist stakes

The endless negotiations between Cyprus, the EU and Russia over an aid package can only be understood through the prism of the imperialist tensions that have shaped this small island. First, its military geo-strategic position is of the highest importance. NATO has a base there as well as Britain. Moreover, Cyprus is recognised as Europe’s Mediterranean aircraft carrier. The only Russian naval base is located in a country which, to say the least, is unstable and looks out towards Cyprus ... Syria! The problem here is that Russia, which supports Bashar Assad, is in danger of having to leave Syria in the event that the current regime is defeated. If the Russians were to leave Syria, Cyprus, located a hundred kilometres away, could make the ‘move’ much easier by letting Moscow retain a base in the Mediterranean. Europe, dependent to a large extent on Russian gas, would then, in exchange for financial support, be eager to partake (out of necessity) in the exploitation of Cypriot gas resources estimated to be several hundred billion cubic metres. Obviously, the Russian leaders would see this as a threat to their capacity to negotiate with Europe since Cypriot gas would allow Europe to counter any Russian ‘blackmail’ with regard to gas supplies. Finally, Cyprus has become a haven for twenty years for the more or less secret funds of the Russian oligarchs and manages tens of billions of Russian euros! Russia also has, in this respect, every reason to support Cyprus or to ‘buy’ Cyprus. Obviously, there is no clear agreed approach within Europe. The Cypriot economy will be ‘rolled over’ if necessary but Europe will not lose Cyprus or only at the cost of a bitter struggle.

It’s always the working class that pays the price. Taxing accounts of more than €100,000 is only one of the consequence of Cyprus’s bankruptcy. Taxes and charges of every kind will rise dramatically, austerity will increase sharply, and recession will worsen the economy, unemployment and poverty will spread like the plague. In fact, like those living in Greece or Spain before them, the workers in Cyprus are today suffering the fate that capitalism has in store for the world’s working class. One myth, the belief, deliberately cultivated by leaders across the world, has just been toppled: ‘Do not worry, whatever happens, the money in your bank is safe!’

The initial proposal to tax all Cypriot accounts has destroyed this illusion. The idea of the EU agreeing to this measure of direct theft was that it was the peculiar product of a tax haven that for years was granting dividends on savings that had been excessive, immoral and unbearable for economy. Cypriots had thus benefited unfairly from the system, and as a result they had to accept responsibility for the ‘repairs.’ But you can see right through this! Especially in Europe, the dominant idea was not ‘Cyprus is an exception’ but rather ‘It can happen to us too tomorrow,’ ‘They are thieves’, ‘They have no right to interfere in our economies’. It was necessary to stem a possible run on the banks on the island and also possible contagion: the EU backtracked and spared the ‘small fries’. But the out and out guarantee for the bank accounts has to be taken for what it is: an illusion. This is what is in store for the entire working class tomorrow: in order to replenish the coffers, States, regardless of the colour of the governments in place, in every country, will not hesitate to take money from us, to reduce us to poverty, to throw us into the street. Cyprus is not an exception! If it isn’t seizing hold of our bank accounts, we’ll be robbed with higher taxes and larger bills, or by soaring prices due to rampant inflation. Under capitalism, all roads lead to poverty. Our trust in the future remains firmly with the struggles of the working class and their increased unity and solidarity in confronting the capitalist state in all the countries of the world.

T and P (20/4/13)


1. This part is based to a large degree on the work of Alain Blondy, Cyprus or Europe, at the gateway to the Orient.