On Tuesday the Cypriot parliament rejected an international bailout deal aimed at keeping the country’s struggling banks afloat. The most controversial part of the agreement was a proposed €5.8 billion deposit levy on Cypriot bank deposits. Adonis Pegasiou writes that the agreement, pushed for by Germany, may create a precedent that will see a fall in confidence in other countries in Southern Europe. He argues that the measure shows that Germany should not be allowed to impose its desired solutions on struggling European economies.
The latest proposal of the Eurogroup, regarding the bail out of Cyprus has caused unprecedented unrest that has not been limited to the national or even the European level. The essence of the proposal is for Cyprus to contribute a third of the overall €17 billion financial assistance required via a haircut in depositors’ money, including even the average account holder whose deposits do not exceed €100,000 (i.e. violating the guarantee offered to them in case of bank failure) . In the last Eurogroup meeting, the German finance minister, Wolfgang Schäuble, with the backing of his northern allies and with the blessing of those countries possibly envying Cyprus’s success as an international financial centre, cold-bloodedly blackmailed Cypriot officials with a ‘take it or leave it’ deal. Cypriot officials, though accused by some domestically for their negotiation strategy, at the end of the day had to decide within minutes on accepting a wide haircut on deposits (a red line for Cypriot negotiators, even considered to be a ‘stupid idea’ by the Finance Minister) otherwise the island’s second largest commercial bank would be instantly refused further emergency liquidity assistance and essentially be left to collapse, possibly taking down with it the whole economy.
The proposal of the Eurogroup echoes greatly the infamous ‘golden rule’, i.e. the one who has the gold makes the rules. Germany, being the leading economic power in the EU, with the support of other northern European countries that aspire to its successful export-led economic growth model, has been the country effectively setting the guidelines for EU members in need of financial assistance. Far from the European ideals which respect and promote solidarity among the European people, Germany has stubbornly refused any attempt to acknowledge the particularities of the economic growth models of South European countries in financial need (Greece and Portugal have already felt the ‘Troika effect’, while Spain and Italy have also been in a precarious position for some time now) and has instead tried to enforce its own policy remedies in a ‘one-size fits all’ manner, without foreseeing the likely dramatic consequences of such action. Ironically, Germany has benefited greatly from sharing a common currency with these countries, which has enhanced trading and allowed the country to accumulate an astonishing trade surplus.
Specifically for the case of Cyprus, it has been evident that Germany, led by its uninspiring political elite (Chancellor Angela Merkel and Wolfgang Schäuble), has eyed Cyprus’s economic growth model linked to its establishment as a financial centre and, deliberately or not, has initiated a process of bringing it to an abrupt end. The knock-on effects from this unprecedented decision targeting bank depositors cannot be calculated precisely and what many fear is that such decisions may fuel a vicious circle of economic recession from which Cyprus cannot – and will not – escape easily. Even more, fears of creating a precedent and a possible repeat of such action in other suffering South European states has further exacerbated panic, unrest and uncertainty which essentially put at risk growth prospects in these countries as well. Germany has once again been short-sighted in proposing solutions that do not consider if and how a country’s economic growth model can adjust, but which instead simply aim at getting the maths correct over public debt calculations.
Undoubtedly, those states in need of financial aid have to take certain specific painful measures and adjust accordingly their growth models, taking into consideration errors and inefficient practices of the past that urgently need reform. Yet one needs to place the proposed measures within the right context, weighing, on the one hand, the argument that the rescue aid is based on European tax payers’ money that cannot be spent light-heartedly and, on the other, the necessity of not eliminating any future growth potential for the recipient country. Germany, being the leading power and contributing the most to the European Stability Mechanism, certainly should have a strong say in the rescue packages discussed, but it cannot exclusively and unilaterally determine the fate of the European people within a narrow-minded framework. Practically up to now this has had a boomerang effect, fuelling even further economic uncertainty and misery in Southern Europe.
By becoming a member of the EU, a state has faith in the Europeanisation process which should bring multifaceted benign effects for the economy and society on the whole, in good times and in bad. What we experience now is instead a process of ‘Germanisation’ that in my opinion can by no means be the answer to the problem. It is in such times that it is more evident than ever that the EU lacks charismatic leadership which can unite Europe in finding a way out of the crisis by firstly acknowledging the limits and particularities of each member state.
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Note: This article gives the views of the author, and not the position of EUROPP – European Politics and Policy, nor of the London School of Economics.
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About the author
Adonis Pegasiou – LSE Hellenic Observatory
Adonis Pegasiou is a Research Associate at the European University Cyprus Research Centre, examining the ‘Europeanisation of the Cypriot Economy and how to deal at the national level with the challenges arising from EU entry’ (Research funded by the Research Promotion Foundation of the Republic of Cyprus). As part of his post-doctoral research project he has been offered a two-year Visiting Fellowship at the Hellenic Observatory of the LSE.
Dear Mr. Pegasiou, I have just re-published your article on my personal blog http://www.risorgimento-italiano.org according to the Creative Commons license indicate on your website. This particular license doesn’t seem to allow me to translate your article into my language, Italian, as it would be a derivative work, so I would like to ask your permission to translate it into Italian. Regards.
Sent you an email yesterday,
All the best
Adonis
Dear Mr. Pegasiou
When reading your opinion, some of your comments is challenging to understand.
1. “In the last Eurogroup meeting, the German finance minister, Wolfgang Schäuble, with the backing of his northern allies and with the blessing of those countries possibly envying Cyprus’s success as an international financial centre,”
I must say it’s hard to fanthom anyone envying Cyprus’s success as an international financial centre as one consider Cyprus seemingly utter failure to control it’s financial centre.
2. For Germany and her allies to lend Cyprus 2/3 of the money seems generous.
Why don’t Cyprus find someone else to lend them the money Cyprus has lost/spent as Cyprus is a financial centre and by this prove to Germany and her allies ,as you claim, success as a financial centre ?
Or is the point you are trying to make that Cyprus is a victim of it’s own success ?
Dear John,
As a Cypriot national, you may think that I have a bias in favour of my country, but let me just point out some facts about Cyprus:
1. A few months ago, the Cypriot parliament unanimously and voluntarily voted in favour of the austerity measures proposed by TROIKA. These measures supposedly dealt with structural inefficiencies in the Cypriot economy. The parliament thus acknowledged the need for certain painful measures, and despite not fully agreeing to these measures, decided to act pre-emptively to this end.
2. The Cypriot banks have their share of the blame but no one can undermine/underestimate the effect of the 4.5 billion lost over night as part of the PSI programme for Greece. Such an amount derailed the national debt as well, since the government was forced to come to the rescue for the banks hit by the PSI. Thus, the otherwise significantly well below the EU-average Debt-to-GDP level of Cyprus, increased to unprecedented levels and is set to increase even more because of unsecure loans in Greece.
Therefore, as I see it, securing a stricter and better regulated banking sector, punishing those responsible for disproportionately exposing Cyprus to Greece and securing the direct financing of banks via the ESM, would have secured that the sovereign debt of Cyprus remained viable and within reasonable limits.
But it seems that the direct financing of banks is an issue which is not being considered at the European level. Wonder why…
Adonis Pegasiou (PhD)
Dear Mr. Pegasiou
My main question is how can you claim that anyone is “envying Cyprus’s success as an international financial centre”
From information gathered it seems that Cyprus’s success as an international financial center is build on the fact it’s considered a tax haven.
http://en.wikipedia.org/wiki/Tax_haven
The fact that Cyprus and Germany have so different tax levels somewhat odd. That Germany (and her allies as you call then) has a much higher tax rate to meet their obligations.
http://en.wikipedia.org/wiki/List_of_countries_by_tax_rates
When I read your article it seems to me that in some way think Germany ( and allies) is culpable for Cyprus failure. The strong resentment towards Germany(with allies) for putting conditions for helping Cyprus when they offer Cyprus help for a situation which is their own making.( If others is giving Cyprus better terms why then accept ? )
To have a huge financial center vs GDP is a huge risk.Cyprus earned some good money on taking that risk for a lot of years.
The ESM is a measure put in place because countries like Cyprus do not manage to govern their own countries in a proper way ( and for Germany and her allies to pick up the tab, meaning their taxpayers).
So Why did Cyprus allow such a huge financial center without proper supervision ?
Personally I can understand countries with a high tax burden find it troublesome to ask it citizen to pay for what can be called a tax haven. I can even understand they resent the idea ( of paying for the upkeep of a tax haven)
Can you understand that even if you might not agree?
I understand how the average citizen may feel and that is why I noted in my article that European tax payers’ money cannot be spent light-heartedly, but it is essential to clarify certain points:
1. In order for a country to become a successful financial centre, having a low corporate tax rate is not enough and the literature available on this is vast (e.g. Dharmapala 2008; Dharmapala and Hines 2009). Briefly I will mention that other aspects include:
• governance institutions (better political and legal systems and lower levels of corruption)
• relatively sophisticated communications infrastructure
• small size of country and possibly poor endowments of natural resources
• legal origins most likely linked to the British system
• English as an official language
• Well-educated and qualified personnel (Cyprus has the highest percentage of university graduates throughout Europe)
Therefore if it was that easy for any country to be come a financial centre by lowering the corporate tax rate, everyone would do so.
2. According to the Basel Institute of Governance which analyses countries’ risk regarding money laundering / terrorism financing, and other related factors such as corruption and political risk, Germany (68) ranks higher than Cyprus (114)!! (http://index.baselgovernance.org/Index.html#ranking)
3. By destroying the economic model of Cyprus overnight, you jeopardise the future growth of the island that will essentially allow the government to repay its loan. You thus create a vicious circle with more memorandums following…
3. The money coming as part of the TROIKA agreement are not a gift but money Cyprus will pay back
4. I emphasize that those responsible for the mess of the banking system should be punished to the full
“Adonis Pegasiou is a Research Associate at the European University Cyprus Research Centre”
Cyprus… OK…
BTW, you forgot to tell us why all those poor oppressed countries don’t exit from the euro, and how they got in their situation. Refer to the corruption index by Transparency International for a start. And pay for your mistakes alone. You are all bust and running on German money – yet you believe the liars, the losers are supposed to make the rules… Have no polite words for this.
The bank robbers are sitting in Southern Europe, they consider every little German saver to be their utopian cash cow.
имеют хороший день
Dear Mr. Pegasiou
to your comment about” I understand how the average citizen may feel “. I get the impression that my argument is average , but that does not mean is wrong( some would say that blaming other for their own wrongdoing is common).
1 I would say you tell me how to build a tax haven, so we agree on Cyprus is a tax haven.
” Well-educated and qualified personnel (Cyprus has the highest percentage of university graduates throughout Europe)” as some of the countries who has foot the bill can not afford to send their children to all that education should not feel the need to send money then.
And if Cyprus has the most education level in Europe,does that just make Cyprus more culpable for it’s own action.
2. So would it be be wrong of Germany to keep its money and fix it own problems with corruptions and to give their own youth a higher education to fight this problem.
“Therefore if it was that easy for any country to be come a financial center by lowering the corporate tax rate, everyone would do so.” Maybe not all agree with that statement as some would have moral grounds for not doing so.
Nordic countries( bottom feeders in your list on corruption) has a well educated population with some English skills
(http://www.economist.com/blogs/johnson/2012/10/language-skills)
( being from the one of thee Nordic countries myself)
3 In 2017 without the lending Cyprus debt will be 107 of GDP (IMF), with the lending the it would raise Cyprus debt to 130 GDP ( appr 40%) today – a level too high. Hence I question your claim that this is a loan.
4. Robert S. McNamara said once that if he got a difficult question he answered the question he wished he got. As an average person I wonder if you have made his approach your own .
So AGAIN why is it moral necessary for Germany to help a tax haven (as an average person myself I question why one should help banks who helping Russian oligarch plundering their own people.)?
It’s beyond me why the German people put up with footing the bill for all the southern mistakes . Germany has to have an extra special tolerance for helping others and if I may add, Germany has my respect for saying No (or more correctly partly no) for paying to keep a tax haven.( Guess they help, so ordinary people do not suffer to much)
I will complement you on not having the all too common rant about the second world war
If for some reason some who read this reply, need to start a rant – do not, as I am from Norway.
It is evident that you have made up your mind about Cyprus, considering that the country is nothing more than a tax haven for money laundering. We could sit here all day with me offering further info that proves the opposite but I think that is a fruitless conversation given your firm position.
If the German way is the way forward within a Union then only time will tell if this is the right way… Cyprus made history with an economic miracle in the post 1974 tragic events, let us all hope that the people of Cyprus can produce an economic miracle once again
I don’t think the banks will open again.
I’m really fed up with all the hypocrisy. So Cyprus is a tax haven, but Luxembourg is not! Strangely enough Amazon as well as other mammoth companies have agreements with Luxembourg which let them get away with a minimal VAT and all sorts of tax reliefs. Basing on that favourable tax haven treatment Amazon is now busy killing any other online e-commerce company in Italy, France, UK, Germany etc. But I can’t hear anybody’s voices shouting against Luxembourg, let alone Frau Merkel and Herr Schaeuble’s. Why? Because Luxembourg is German’s darling, same culture, same language, probably same racist attitude. Provided you have a racist attitude towards Southern countries, Germany will always love you. That holds true for Sweden, Finland, Holland etc. What happened to the ideals of a united Europe? Well, not only are they stone dead, but I doubt they ever really existed in the first place. Now that the United States are pulling away from Europe, which is no longer a strategic concern to them, Germany and France are rearing their ugly heads again filling the power vacuum. This reminds me of the appeasement policy practised towards Hitler (and we have seen the consequences of that). Now every country is heeding what Germany wants and just follows suit. If Germany wants to bash Cyprus today, the Northern countries will go along with that, if Germany should choose another victim tomorrow, the Northern countries would go along with that as well. I can’t really see this immoral bashing of countries go on for long without major warfare being the final result. Mind you: the Southern countries are not really in a position to defend themselves at the moment, they are too weak. But as France and the UK seem to delight in causing war in their former colonies by supporting the “rebels”, there might be other emerging powers that start playing that dangerous game against Germany, France and the UK. After all, Cyprus, Catalonia, Spain, Portugal, Greece and Italy are rife with indignation and who knows what could happen if someone started to fan the flames. As a Spanish right-wing journalist more or less said (Mr. Federico Jiménez Losanto, Libertad Digital), these are interesting times to live in. Interesting because they are so dangerous, unfortunately.
wow wow wow this was such an interesting conversation, until you came in with hatred and threats. Agree to disagree without bringing war threats. Agree to disagree is a foundation to sane democracy. Please Roberto, please allow people to express different opinions, you are spoiling the reading with your hatred. My very best regards to all the european readers. John and Adonis thank you guys for this very interesting debate of idea where each of you tried to convince with vindication. It was a pleasure reading you both.
“without” vindication, sorry, I should have read myself twice if not more 😉
I am trying to show you that what I wrote is not so strange. This is what Luxembourg’s Jean-Claude Juncker, former head of the European Commission, wrote, “Wer glaubt, dass sich die ewige Frage von Krieg und Frieden in Europa nie mehr stellt, könnte sich gewaltig irren. Die Dämonen sind nicht weg, sie schlafen nur.” This means “whoever believes that the eternal question of war and peace in Europe will never come up again, could make a huge mistake. The demons haven’t disappeared, they are just sleeping.”
And this is Der Spiegel’s author Augstein, “Wie schon zweimal zuvor in ihrer jüngeren Geschichte lassen sich die Deutschen immer tiefer in einen Konflikt mit ihren Nachbarn führen. Ohne Rücksicht auf die Kosten und mit einem Ziel, das einem Angst und Bange werden kann: die deutsche politische Vorherrschaft auf dem Kontinent.
Merkels Vorstellung von europäischer Integration sieht so aus: Europa soll sich Deutschlands Politik beugen.”
Translation: As already happened twice in their recent history, the Germans let themselves be involved in an ever deeper conflict with their neighbours. Without taking the costs into consideration and with an aim that inspires fear and terror: German political supremacy on the continent. Merkel’s idea of European integration looks like this this, “Europe must bow down to German policies.”
Dear Wouter, what I’m saying is basically that nation-bashing creates a lot of resentment and hatred in the countries affected which could end up in unintended consequences. That’s something completely different from advocating war or hatred among different peoples.
Basically it was Dijsselbloens idea and he practised weeks ago in Netherlands: http://www.bbc.co.uk/news/business-21290255 . In fact, shareholders and holders of senior bonds lost everything.
Dear Mr. Pegasiou
To make myself clear. I propose that Cyprus had the bad fortune of by being hit by
1 Bad banking
2 bad policies
3 bad luck
When i read tour article I mostly read it as accusation moral indignation towards Germany
( some of the language you use to describe Germans, if used about somebody from the south of Europe by a German, he would have been called something like some of the words some Cypriots use against Merkel. Personally I just believe you are frustrated by the dire straits your country is in, understandably so.)
That is why I asked “the moral question”.
As all politics is local – I must say I am kind of surprised that Cyprus do not understand German politics better.( referring to tax haven and so on. The more Cyprus attacks Merkel for not giving relief to ” Russian oligarchs money laundering banks” the more votes she gets. Why Cyprus do not understood this is simply beyond me. How could one not understand the difference between the other nation in the south and Cyprus. No one wants to see the south go hungry so one do what man must ( with no pleasure) even if one find that what you call the “southern model” in my view and maybe a lot of others is a total failure. It’s not the argument of the model – it’s the result of the southern model that scare us – the bankrupting of your own countries and the poverty that follows. Hungry southern children is not a good political cause ( even if Germans in their own view is tired of paying for the mistakes of the south ( helping those in need better.) – BUT helping a tax haven ( with Germany taxmoney) a no go. So if Cyprus do not understand the German side of this then Cyprus end up where Cyprus is now.
To put it bluntly If there was a bailout she could say no to, it the one to Cyprus. But some would say Cyprus say no if they don’t accept – and the problems is Cyprus own. ( If they do say NO some will use Cyprus to show who bad it goes when one do the proper thing. )
The Russian trip did not make Cyprus any favors when it comes to doggy banking by the way.
The idea that German is envious a lot less likely then that a Germany do not like tax havens.
( Those who want to do business in tax haven will not move their business to Germany or other high tax countries)
Hope for Cyprus sake they say Yes to what ever deal presented from EU. If not i fear Cyprus will be the an argument in the southern countries as to why one must follow the rules from EU
Tank you for taking the time to answer my erroneous ways
John
If they do say NO some will use Cyprus to show who bad it goes when one does not the proper thing. )
I have just found this speech by Mr. Olli Rehn at http://europa.eu/rapid/press-release_SPEECH-05-278_en.htm?locale=en. The speech is dated 13 May 2005. It makes for an interesting reading.
Speech by Mr Olli Rehn
Member of the European Commission, responsible for Enlargement
“Cyprus: one year after accession”
Cyprus International Conference Center
Nicosia, 13 May 2005
Ladies and Gentlemen,
I am glad to be here in Cyprus today, just one year after you joined the European Union. The accession of Cyprus has been a success story. You have new economic opportunities and you enjoy the security benefit of EU membership.
Let me begin with what the EU is all about, which stems from 55 years ago and is still relevant today – not least here in the Eastern Mediterranean.
On 9 May 1950, Robert Schuman, then Foreign Affairs Minister of France, stunned Europe and the world in a speech where, in the name of his government, he reached his hand out to Germany. Inspired by his main advisor, Jean Monnet, he proposed to place the Franco-German production of coal and steel under a common organisation open to the participation of other countries of Europe. “The coming together of the nations of Europe”, he said, “requires the elimination of the age-old opposition of France and Germany”.
Remember that 1950 was only five years after the end of the Second World War. The people of Europe were still deeply feeling the pain of occupation, bombardments, death, terror, fear and anger. To say the least, such an initiative required vision and courage in the face of widespread prejudices. It also required wisdom and realism: “Europe will not be made all at once, or according to a single plan” Schuman said; “it will be built through concrete achievements which first create a de facto solidarity”.
The choice of coal and steel was thus not the result of chance, of course, as they were at the time the basis of industrial development as well as the indispensable materials for war efforts. Schuman added: “The solidarity in production [of steel and coal] will make it plain that any war between France and Germany becomes not merely unthinkable, but materially impossible”.
The Schuman declaration was thus much more than just another proposal for improving international cooperation. It was the lesson drawn from centuries of conflicts, divisions and hatred. It was the acknowledgement of the fact that, in such a confined and populated area as this European continent, with so many different ancient nations and cultures, and against such a historical background, there was only one option left : peace – but not just any peace : peace through unification.
Robert Schuman’s invitation was enthusiastically taken up by the German Chancellor Konrad Adenauer and by the leaders of four other countries, Belgium, Italy, Luxembourg and the Netherlands. It is worth noting that “founding fathers” of Europe like Robert Schuman of France, Konrad Adenauer of Germany or Alcide de Gasperi of Italy were all men who were born and had grown up in border regions, where they experienced the painful consequences of fanaticism and nationalism on the frontline of two world wars.
Less than a year after Robert Schuman had made his famous speech, the Treaty establishing the European Coal and Steel Community was signed, laying the ground for the European integration process, which keeps Europe united today.
Ladies and gentlemen,
55 years after this turning point in European history, there is no doubt that our common project has been an overwhelming success. I certainly don’t want to paint only a rosy picture and ignore the current difficulties of Europe, some of them quite serious. But once we put the facts into the right perspective, nobody can deny that never before has Europe experienced such a long period of peace, democracy and prosperity.
It is not by chance that this enterprise has attracted more and more countries. It soon became a reference point, a symbol for modernity and openness, liberty and solidarity. Joining Europe became a goal for all those countries which were victims of dictatorship, for those which were kept out of the European Union against their will by the Cold War and the division of Europe. As soon as they cast off their chains, their prime pursuit was to join our family of democratic nations. The EU was also a strong catalyst for change and reforms, often demanding and even painful. But the end result is certainly worth the effort.
You have just successfully completed your first year of EU membership. Your sound economic record was justly rewarded by the decision of the EU to let Cyprus join the 2nd phase of the Exchange Rate Mechanism, which paves the way for a successful entry to the Euro-zone in a few years. I look forward to the national plan to implement the Lisbon strategy of growth and jobs. I equally expect an early ratification of the new constitution for Europe.
However, it is regrettable that Cyprus entered the EU as a divided country. Of course, there is no doubt that trade across the Green Line, the routine crossing of thousands of Cypriots every day and the possible opening of new crossing points are positive signals. The Cypriots have also proven that the two communities can live peacefully together.
But these developments cannot replace a comprehensive settlement of the Cyprus problem. I am aware of the pain that the present situation causes. There are still minefields, barbed wire and blue helmets across your island. The northern part of the island suffers from a brain drain and economic isolation.
Ladies and Gentlemen, in today’s European Union, such a status quo jars. After three decades of separation and one year of EU membership, it is now high time for reconciliation and vision, for courage and far-sightedness on both sides, to help Cyprus become a Member State like all the others – that is: united and in peace.
The current situation offers real opportunities to launch a fresh momentum. First, Cyprus has become an EU member state – an achievement that ensures that neither inter-communal violence nor military intervention should occur again. Second, the European Council decided to open accession negotiations with Turkey. And third , the Turkish Cypriot community, as shown by the latest elections, seeks the reunification of the island and its integration into the EU.
(end of the first part, the rest can be read at the link posted)
Although I would not agree on every count I believe the author summed up some things pretty well. EU crisis is political crisis in first place and inability to solve issues in coherent and quick manner like Americans did after Lehman collapse. Think of it IF Lehman would be to happen tomorrow in EU, what are the chances Eurozone would survive?
But there is even more painful question coming from recent past. As I can understand when Berlin + Brussels staged Greek restructuring they also forced creditors to swallow hard by writing off Greek debt in de-facto compulsory manner. As far as I know Cypriot banks were naturally big in proportionate terms investors. Unsurprisingly that write off excercise could have left a good hole in Cypriot banks balance sheets. Add other problems like Cyprus dependence on Greece including implicit risk pass through and you may get a better picture.
Now, after forcing Cyprus to bite the bullet Berlin & Co come again and ask to bite the second bullet… leaving only one question: will the third bullet will be straight in the head?
NB: I have no association with Cyprus or its banks and never was to Cyprus.
Crisis In Cyprus
Very informed discussion! I would only add this thought…
While everyone is looking at the possibility of one or more of the periphery countries leaving the Euro, it may be in the best interest of Germany to leave first.