Amor Fati? Europe Wounded after the Cyprus Imbroglio

By LSE IDEAS Blog, Dr Vassilis Paipais, and Dr Eirini Karamouzi

For the past two weeks, we have been witnessing a fierce diplomatic game with Cyprus at the epicenter of a geopolitical vortex threatening European solidarity. The Cyprus case offered the ideal testing ground on which some of the key players of the European economic crisis stretched their muscles and tried out new ideas such as the bailing-in of uninsured depositors – not an option before the Cypriot crisis. At the same time, Nicosia and by default the debtor countries of the European South got a flavor of their limited diplomatic clout and a hard to miss warning about what may lie ahead if things get worse. Is this another crisis Europe can muddle through? Or does it inaugurate an era of dangerous instability due to irreconcilable interests between the Eurozone’s ‘haves’ and ‘have-nots’ in the absence of political skills to mitigate its consequences?

The debacle over the debt-ridden island is emblematic not only of the growing dysfunctionalities of the monetary union but of the unchallenged hegemony Germany exercises over Europe. It is widely argued that the small size of the island’s economy and likely limited contagion risk prompted the German leadership to use Cyprus as a laboratory case for future bail-outs. Arguably, the tepid reaction of the markets following the rejection of the first bail-out plan by the Cypriot Parliament persuaded Mr. Schäuble that a Cy-exit could set a positive precedent and send a clear message to the rest of southern countries struggling to meet Berlin’s stern budgetary standards. The German leaders’ popularity is suffering a heavy toll across the European South but they find this less costly than trying to convince German voters that their hard-earned money is going to shore up fundamentally rotten countries or bail-out wealthy Russian oligarchs. In the meantime, the real victim of the German hard line is the Eurozone itself and the prospects of a banking union. Even if the intentions of the German leadership is to prepare the ground by deleveraging inflated banking sectors, attacking the sanctity of bank deposits and causing anxiety among its Southern peers is no way to go about it. It is not yet clear if there is a German plan for hegemonising Europe or whether Germany is building an accidental Empire through its protestant obsession with punishing Southern profligacy. What is less uncertain is that Germany’s unchecked hubris is more likely to reap resentment and suspicion. This is especially so given the widespread certainty among citizens of the debtor countries that Germany is profiting from the crisis by way of interest payments and capital inflows from a devastated European periphery doomed to sluggish growth for many years to come.

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