Allister Heath on Capital Controls

THERE is something truly terrifying about capital controls, the harsh restrictions that may soon be imposed on Cypriots. The freedom to take your money out of a country, and into another, at will and with no taxes, is an essential bulwark of a free society. It is also a central tool in a world of globalised commerce, multinational corporations, the internet and integrated supply chains. The free movement of capital helps maximise an economy’s efficiency by allowing capital to be allocated where it is the most needed, regardless of country, and where it can generate the best risk-adjusted returns.

It also helps discipline politicians: if they tax individuals too much, or debase the currency excessively (via inflation or by engineering an excessive depreciation) citizens can show what they think by voting with their feet, or at least via international bank transfers.

In Exit, Voice and Loyalty, the sociologist Albert O Hirschman pointed out that members of an organisation (such as a country) who are dissatisfied can either protest by using their voice (voting, demonstrating or arguing) or by exiting (removing themselves or their money). Eliminating the free movement of capital makes the second option unviable; even if the freedom of movement for people is maintained, many Cypriots will become prisoners in their own island, unable to leave without having also to abandon their savings and assets.

With the banks shut – apart from the ability to withdraw as little as €100 from bank ATMs – there are, of course, already crippling capital controls of sorts in place. It is not possible for Cypriots to move money down the street, let alone to another country. But the imposition of formal restrictions on removing cash from the country would mean the euro ceasing to be a truly single currency. Imagine if one couldn’t move money from London to Birmingham, and that there were therefore for all intents and purposes a series of regional pounds: sterling would no longer be a unified currency. Similarly, a Cypriot euro would no longer be a proper, fully-fledged euro, regardless of what the Eurocrats would like the rest of us to believe, at least for as long as these capital controls remain – and like all bad, oppressive laws, they will have a tendency to live on forever.

There may be instances when controls are temporarily inevitable. A country seeking to exit the euro may have to impose them. Some economists argue that the free movement of capital can be destabilising – if too much money pours into a country, bubbles and extreme volatility may result. But even when true, the costs of capital controls remain greater than their benefits.

Everywhere one looks, capitalism is in retreat. We have seen banks bailed out and nationalised (rather than wound down), a return to punitive top tax rates, a new focus on industrial policy, a fresh belief in the powers of the state to control demand via aggressive fiscal and monetary policies, a weakening of central bank independence and the return of pro-inflation voices and policies. The threatened imposition of the most brutal of all possible wealth taxes – confiscating cash from bank accounts – and the reintroduction of capital controls within the EU are just the latest blow. What will come next? Limits on the free movement of people within the EU?

Slowly but surely, the liberal international economic order which has done so much to reduce poverty and improve the living standards of billions of human beings is being undermined. Unless the tide turns before it is too late, we are truly in trouble.

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