Cyprus Isn't Taxing Deposits, It's Confiscating Them
"Tax: A fee levied by a government on income, a product or an activity....The purpose of taxation is to finance government expenditure."
In this situation, depositors aren't being asked to cough up additional money to meet a tax liability. To the contrary, a portion of Cypriot deposits will be confiscated -- electronically, no less -- by the government because that's what euro zone finance ministers, the European Central Bank and International Monetary Fund demanded as a precondition for a 10 billion euro bailout.
The alternative? Allow Cyprus' two biggest banks to collapse, which could cause an implosion of the entire financial chaos and a swift exit from the euro zone.
The proposed plan, which must be approved by the Cyprus Parliament, would impose a tax of 6.75 percent on deposits of less than 100,000 euros and 9.9 percent above that level. This amounts to a seizure of private property. No wonder the Cypriots are outraged. Euro-zone depositors are supposed to be insured for up to 100,000 euros. Message: Deposit insurance isn't worth the paper it's printed on.
And that's just one reason this not-really-a-tax sets a bad precedent. The decision to seize private property means that all assets in the euro zone are at risk, subject to the whims of politicians as they try to prevent their dream of a united Europe from shattering.
In 1995, Bernard Connolly published "The Rotten Heart of Europe: The Dirty War for Europe's Money," a first-hand account of Brussels' bureaucrats attempt to create a monetary union in what was hardly an "optimal currency area," as described by Nobel laureate Robert Mundell. Connolly, who was head of the exchange rates and monetary policy unit of the European Commission from 1989 to 1996, was summarily dismissed from his post. He's been an outspoken euro-skeptic ever since. As the EU is rattled by its umpteenth crisis since Greece announced it was cooking its books in 2009 -- this time by a country whose annual output is a mere 0.2 percent of the euro zone economy -- he has proved to be prescient.
(Caroline Baum is a Bloomberg View columnist. Follow her on Twitter.)