26th Oct 2016

Germany and ECB clash over Cyprus

  • Germany's finance minister Schaeuble says Cyprus is not big enough to pose any dangers to the eurozone (Photo: World Economic Forum)

The European Central Bank is at odds with Germany finance minister Wolfgang Schaeuble over the consequences of not bailing out Cyprus and its wider implications for the eurozone.

Last week Schaeuble claimed that Cyprus was not "systemically relevant" to the survival of the eurozone. But ECB Mario Draghi has directly contradicted the statement Der Spiegel reported in a preview of its Monday (28 January) edition.

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Draghi retorted that he "hears that a lot from jurists," as Schauble has studied law. But the question whether Cyprus is systemically relevant was a matter for economists to decide, the Italian banker said, warning that a Cypriot bankruptcy would destroy the recent market calm about the eurozone.

Economics affairs commissioner Olli Rehn and the head of the eurozone bailout fund (ESM), Klaus Regling, sided with Draghi, Spiegel reports.

ECB board member Joerg Asmussen took a similar stance: "Disorderly developments in Cyprus could undermine progress made in 2012 in stabilising the euro area. Cyprus could well be systemic for the rest of the euro area despite its size."

"Under normal circumstances one would expect the direct impact of a default to be limited, and it's obvious that without assistance the country will default," Asmussen told Reuters on Tuesday.

A spokesman for the German finance ministry on Monday told this website that he cannot comment on "internal Eurogroup discussions."

The spokesman noted however that "the question of whether the situation in Cyprus endangers the stability of the eurozone as a whole" is part of the legal base for a bailout from the eurozone funds.

Discussions will continue pending a report by the troika of EU commission officials, ECB and International Monetary Fund. A meeting of eurozone finance ministers in March will come back to the Cypriot bailout request, the spokesman added.

Meanwhile, Cypriot officials claim Germany is stalling the island's bailout and accusing it of being a money laundering hub out of political considerations ahead of general elections in September.

"The issue is a political one because of the German elections," a Cypriot government source told AFP.

"Another reason is that countries would like to have a piece of our pie as a financial centre," the source added.

A leaked report by the German foreign intelligence service pointed to Russian and Ukrainian oligarchs laundering money in Cyprus. Its politicians have since tried to convince EU officials this is not the case.

"It is obvious that behind the attacks against Cyprus there are vested interests. Those who attack Cyprus want to take its role as a serious, international, financial and investment centre," government spokesman Stefanos Stefanou told reporters on Thursday.


Europe ready to tackle Greek debt relief

The Greek government has built and broadened alliances in EU institutions and member-states that acknowledge the need to restructure the debt and deliver another economic model for the eurozone.

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