At the beginning of last week, the Eurogroup reached an agreement with the Cypriot authorities on the bailout programme that had been in discussion since the middle of last year.

It is significant to note that the previous Cypriot Government had not wanted to conclude discussions, while the powers that be in the Eurogroup and the European Central Bank knew that time was on their side, as the more time passed, the more likely that Cyprus would have had to accept the conditions imposed on it. And this is exactly what happened. At the time everyone drew a sigh of relief, but I wonder if that was the appropriate reaction.

Just as some countries in the EU did not like thetax regime of Cyprus and its financial sector, neither do they like ours. If we ever come to need help from the EU, we will face the same impositions Cyprus had to face

In principle, the programme is expected to restore viability to the financial services sector in Cyprus, restore sustainable economic growth and restore sound public finances. It does this through a loan of €10 billion and a tax on bank deposits of over €100,000. The chairman of the Eurogroup first said that this tax on deposits was a unique measure, given the circumstances. Then he stated that this solution could be used as a template for other states. It needs to be remembered that when Greece and Ireland required a bailout, such a tax was not imposed; and one can understand why: it would have hurt German and French banks. In the Cyprus case, it hurt international banks that are neither French or German.

In reality, the imposition of the Eurogroup is meant to achieve a downsizing of the banking sector, such that the domestic sector reaches the EU average by 2018. There will be an independent evaluation of the money laundering framework in Cypriot financial institutions. Corporate tax will increase as will the withholding tax on capital income.

The Eurogroup is also looking at a financial contribution from Russia, which has a great deal of money invested in Cyprus. Cyprus will also need to step up its efforts in the areas of fiscal consolidation, structural reforms and privatisation.

The 12 days that have passed since the deal between the Eurogroup and Cyprus was reached, have allowed us to place this agreement in perspective. Admittedly, the previous Government of Cyprus had adopted a loose fiscal policy in response to requests from its power base – the trade unions. This certainly did not help the situation. However, I also believe that some leading EU member states seized the opportunity that was presented to them and forced on Cyprus draconian measures aimed at destroying their financial services sector for their own benefit.

The resultant impact on the Cypriot economy will be severe and unemployment will shoot up. Some have concluded that the Eurogroup’s imposition on Cyprus is the first move within the EU towards fiscal harmonisation, irrespective of the cost to Cyprus.

One can even understand better the broad perspective when one considers the response given to Italy by the European Commission on its fiscal sector deficit. Italy has been told it cannot expect any derogation on this issue, even though its deficit as a percentage of the gross domestic product is lower than that of a number of other countries, such as France. Moreover, even though Italy’s debt is well over 100 per cent of its GDP, France’s debt is not much lower than 100 per cent.

Where does Malta fit into all this? My contribution of two weeks ago did highlight that Malta is not like Cyprus. Irrespective of what politicians say to each other and to the media, we have been relatively virtuous in the management of our public finances.

We have a stronger regulatory framework. And our financial sector, although its importance in the economy is similar to that of Cyprus, is structured differently. The domestic sector is rather self-contained and the external sector reflects a number of inter-company transactions that do not impact on the domestic economy.

On the other hand, just as some countries in the EU did not like the tax regime of Cyprus and its financial sector, neither do they like ours.

If we ever come to need help from the EU, we will face the same impositions Cyprus had to face. I believe that what happened in Cyprus represents a threat to Malta and its economy and should be taken seriously. Within this context we all have a role to play to ensure that this threat does not become a reality.

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