Friday

18th Aug 2017

Opinion

The far-reaching implications of Cyprus' euro crisis

  • 'With each bailout and with every other EU summit, leaders are moving the goal posts' (Photo: ANA BELÉN CANTERO PAZ)

The political-economic implications of the Cyprus bailout are far-reaching. First of all, the eurozone has for the first time chosen not to protect depositors.

Usually when a bank goes belly up, you expect stock holders to be wiped out first, followed by bondholders. Only after exhausting all other options, depositors would be hurt. On Cyprus the battle between economics and politics resulted in another course: (senior) bondholders aren’t being touched, while retail savers are being punished.

Thank you for reading EUobserver!

Subscribe now and get 40% off for an annual subscription. Sale ends soon.

  1. €90 per year. Use discount code EUOBS40%
  2. or €15 per month
  3. Cancel anytime

EUobserver is an independent, not-for-profit news organization that publishes daily news reports, analysis, and investigations from Brussels and the EU member states. We are an indispensable news source for anyone who wants to know what is going on in the EU.

We are mainly funded by advertising and subscription revenues. As advertising revenues are falling fast, we depend on subscription revenues to support our journalism.

For group, corporate or student subscriptions, please contact us. See also our full Terms of Use.

If you already have an account click here to login.

Leaders and officials can claim Cyprus is a special case as often as they like, they will probably not be able to prevent depositors in other eurozone periphery countries from worrying about their savings. In Italy especially, depositors could get nervous because the Italian government enacted a deposit levy (of 0.6%) in 1992 and the Italian constitutional court decided in 1995 that the levy was legal.

The second implication of the Cyprus rescue is that the German dominance in Europe is getting bigger and bigger. People are increasingly referring to Germany as a bully.

In the short term, imposing its will can be profitable for Germany. But in the longer term, even Berlin cannot do without some support from other eurozone countries in operating on the global political, diplomatic, and economic stage.

If Germany disregards its steadily worsening image as the big bully of southern Europe, this will come back to haunt Berlin in other areas.

New openings for Russia

The Cyprus case also has a geopolitical side. Foreigners hold 40 percent of the €68 billion sitting in Cypriot banks, and most of that belongs to Russians, who for decades have favored Cyprus as an attractive place to stash their (illegal) money. Russian oligarchs will therefore be particularly hard hit by the bank levy.

You would think that the Europeans would have had close contact with Moscow – which had previously given Cyprus a €2.5bn loan - during the negotiations in order to make sure that Russia wouldn’t go and spoil things after a deal was made public. But Russian president Putin didn’t waste any time in denouncing the deal as “unfair, unprofessional and dangerous”. And Gazprom – the Russian energy giant controlled by the state – seems to have offered Cyprus a proposal in which the corporation will undertake the restructuring of the Cypriot banking system in exchange for exploration rights for natural gas.

Moscow clearly is using the euro crisis as an opportunity to make new inroads into Europe and to drive a wedge between countries. They are already used to doing that in negotiations on gas contracts, but the crisis offers new openings for Russia to strengthen its strategic position in Europe.

North-South dimension

The eurozone and EU are aware of that and that is one of the reasons why other countries will not let Cyprus go under. It may be a small island with an insignificant economy, but its geopolitical importance is not to be underestimated (for example, the Russians are in danger of losing their important military port in Syria and could be interested in Cyprus as an alternative).

So, apart from the Great Game of negotiations on a bailout, in the background there’s also a second Great Game going on, that is possibly of even greater concern to the future of Europe.

The fourth implication of the bailout for Cyprus is that for all the talk and boasting about a European banking union, the arrangement for Cyprus exemplifies the long distance Europe still has to go before we can speak of a meaningful banking union in the eurozone/Europe. The deal undermines confidence in cross-border banking and resolution, contributes to the fragmentation of the banking sector, and endangers the single market.

To conclude, the bail-in of depositors in the Cyprus bailout package is legally sound, but a difficult sell on political, social, and moral grounds. The economic reason for getting depositors involved is that hitting senior holders of bank bonds would cause a domino effect through the eurozone. In the end this could turn out to be a wrong decision, if Cyprus makes investors and depositors elsewhere nervous about their savings in other periphery countries, causing capital to flow from the south to the north.

Eurozone leaders are struggling more and more to find the right balance between economically sound policy and politically wise decisions. With each bailout and with every other EU summit, they are moving the goal posts a bit. With that, they undermine confidence in the political system as a whole and in the financial sector.

If leaders fail to come up with a comprehensive way to deal with the crisis, sooner or later politics and economics are heading for a full frontal collision resulting in higher interest rates in the southern as well as the northern eurozone and a significant weaker euro.

The writer is a Global Political Analyst at ECR Research in The Netherlands

Cyprus blamed for decision to tax small savers

The European Commission has said it was Cyprus itself that insisted on the most unpopular detail of its bailout. But the commission is not squeaky clean either, say others.

Column / Brexit Briefing

The return of the chlorinated chicken

Britain has only just started on the path towards a post-Brexit trade deal with the US, but you can already see the same all-too-familiar disagreements.

Stop blaming Trump for Poland’s democratic crisis

If you were to judge events purely on the US media's headlines, you would be forgiven for wondering if the Polish government had anything to do with its recent controversial judicial reforms.

News in Brief

  1. Macedonia sacks top prosecutor over wiretap scandal
  2. ECB concerned stronger euro could derail economic recovery
  3. Mixed Irish reactions to post-Brexit border proposal
  4. European Union returns to 2 percent growth
  5. Russian power most feared in Europe
  6. Ireland continues to refuse €13 billion in back taxes from Apple
  7. UK unemployment lowest since 1975
  8. Europe facing 'explosive cocktail' in its backyard, report warns

Stakeholders' Highlights

  1. European Healthy Lifestyle AllianceDoes Genetics Explain Why So Few of Us Have an Ideal Cardiovascular Health?
  2. EU2017EEFuture-Themed Digital Painting Competition Welcomes Artists - Deadline 31 Aug
  3. ACCABusinesses Must Grip Ethics and Trust in the Digital Age
  4. European Jewish CongressEJC Welcomes European Court of Justice's Decision to Keep Hamas on Terror List
  5. UNICEFReport: Children on the Move From Africa Do Not First Aim to Go to Europe
  6. Centre Maurits CoppietersWe Need Democratic and Transparent Free Trade Agreements Says MEP Jordi Solé
  7. Counter BalanceOut for Summer, Ep. 2: EIB Promoting Development in Egypt - At What Cost?
  8. EU2017EELocal Leaders Push for Local and Regional Targets to Address Climate Change
  9. European Healthy Lifestyle AllianceMore Women Than Men Have Died From Heart Disease in Past 30 Years
  10. European Jewish CongressJean-Marie Le Pen Faces Trial for Oven Comments About Jewish Singer
  11. ACCAAnnounces Belt & Road Research at Shanghai Conference
  12. ECPAFood Waste in the Field Can Double Without Crop Protection. #WithOrWithout #Pesticides

Stakeholders' Highlights

  1. EU2017EEEstonia Allocates €1 Million to Alleviate Migratory Pressure From Libya in Italy
  2. Dialogue PlatformFethullah Gulen's Message on the Anniversary of the Coup Attempt in Turkey
  3. Martens CentreWeeding Out Fake News: An Approach to Social Media Regulation
  4. European Jewish CongressEJC Concerned by Normalisation of Antisemitic Tropes in Hungary
  5. Counter BalanceOut for Summer Ep. 1: How the EIB Sweeps a Development Fiasco Under the Rug
  6. CESICESI to Participate in Sectoral Social Dialogue Committee on Postal Services
  7. ILGA-EuropeMalta Keeps on Rocking: Marriage Equality on Its Way
  8. European Friends of ArmeniaEuFoA Director and MEPs Comment on the Recent Conflict Escalation in Nagorno-Karabakh
  9. EU2017EEEstonian Presidency Kicks off Youth Programme With Coding Summer School
  10. EPSUEP Support for Corporate Tax Transparency Principle Unlikely to Pass Reality Check
  11. Counter BalanceEuropean Parliament Improves the External Investment Plan but Significant Challenges Ahead
  12. Nordic Council of MinistersCloser Energy Co-Operation Keeps Nordic Region on Top in Green Energy