The recent events in Cyprus should serve as a harsh reminder that all is not well in Europe.
What they have shown is that contrary to popular belief, capital controls are indeed possible within the EU. The general principle about free movement of capital is defined in Article 63 of the EU treaty.
This article stipulates that “... all restrictions on the movement of capital between member states and between member states and third countries shall be prohibited”.
But, like most legal documents, there are numerous exceptions. Countries can actually impose capital controls according to the treaties by citing numerous issues, including but not limited to: ‘prudential measures’ or ‘public security’.
These criteria could be cited by many other countries if they chose to and therefore free movement of capital should not be viewed as something that will always be available.
I have been more optimistic than most about the outlook for Europe and have benefited from a strong equity market rally. European Central Bank president Mario Draghi’s ‘whatever it takes’ speech last year reinforced my view.
However, I have always cited policy error as one of the key risks to recovery both in Europe and elsewhere. I must recognise that I am now forced to question my own optimism.
When you place your money in a bank you should not have to worry about the possibility of losing some or all of your capital. I believe that the bailout of Cyprus could be viewed with hindsight as a serious policy error. Although Cyprus is small (0.2 per cent of eurozone GDP) we should not underestimate the damage to confidence that has been done.
I have given the issue consideration and I do not believe that Cyprus on its own will be the catalyst that sends us into another crisis.
However, I firmly believe that if Spain or Italy face a crisis in the near future, then we will all remember Cyprus and that is when what has been done could come back to haunt policymakers as retail depositors won’t believe the hollow promises. The precedent has been set.
Peter Fitzgerald is co-head of multi-manager at Aviva Investors
