Crisis in Cyprus Threatens EU Role and Legitimacy

Friday, 22 Mar 2013 08:08 AM

 

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By rejecting an EU bailout and turning to Russia for help, Cyprus is exposing growing frustration and dwindling solidarity within a bloc that was meant to bring the continent closer together after World War II.

The chaos over the rescue plan, which the Cypriot parliament roundly rejected Tuesday, has renewed many of doubts about the legitimacy of the European project — notably over perceived German dominance and threats to national sovereignty. The extraordinary spectacle of an EU member seeking salvation from the old Cold War enemy has raised deep questions about how far Europe can and will go to take care of its own.

"I think there is a clear danger of Cyprus being rescued by Russia and the eurozone being seen as less relevant, unable to rescue Cyprus," said Vassilis Monastiriotis, an expert on southeastern Europe at the London School of Economics.

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"It will raise many issues about the legitimacy of the European Union," he said. "Countries may seek financial help from China or Arab states and this may disintegrate the European Union, making it less relevant as an institution."

Ever since the financial crisis five years ago put pressure on heavily indebted countries — from Greece to Portugal to Ireland — the bailouts have become as much a political as an economic issue, with wealthy Germany taking on the role of bogeyman because of its insistence on strict austerity measures as a condition for help. Cyprus' proposed bailout ratcheted up the potential pain by demanding for the first time that depositors help pay for the rescue with their own savings.

Senior European lawmakers raised the alarm Thursday at the possibility of letting Russia ride to the rescue of a nation that represents — with a mere 0.2 percent — a tiny part of the eurozone economy. Many Russians have business interests and hefty bank deposits on the island, and Moscow — flush with oil and gas rubles — could easily afford to extend a 2.5 billion euro loan that it gave Cyprus in 2011 and lower repayment rates.

In return for provide fresh cash or taking over one of the island's ailing banks, analysts have suggested that Russia might demand an interest in natural gas fields that Cyprus has discovered in the Mediterranean.

"We need a European solution to the Cyprus problem, not an external one," European Parliament lawmakers from across the political spectrum said in a statement.

The biggest hurdle to a quick deal is without doubt Germany.

Government officials from Chancellor Angela Merkel down know that it would be difficult to sell her countrymen on the idea of bailing out Cyprus, because unlike with Greece, Italy or Spain, there is little sympathy for a country seen as a haven for tax evasion and the ill-gotten gains of shady Russian oligarchs.

That leaves little room for Merkel to maneuver at home, especially as she is seeking re-election this year.

Germany's opposition Social Democrats, too, have insisted that Cyprus needs to change its business model but warned of the risk of letting the Cyprus problem drag on.

"The crisis is causing serious collateral damage," said Michael Roth, the party's spokesman on Europe. "There's a crisis of faith and solidarity in Europe and at a time when more solidarity would be necessary it's the bean counters who are calling the shots."

Roth said much of the problem lay in mistaken perceptions on both sides. Germans needed to be reminded that they have profited from the overall European economic crisis that has produced low interest rates; Greeks, Irish and Cypriots needed to accept that the bailout packages weren't all about austerity but contained a good deal of financial aid, too, he said.

In Cyprus, much of the fury arose over a proposal to tap the bank accounts of ordinary savers, breaking a taboo in Europe where deposits of up to 100,000 euros are meant to be protected by law. The plan was backed by Cyprus itself before street protests prompted a U-turn in parliament Tuesday.

Some experts say resentment toward Cyprus has compounded the problem.

"I think patience with Cyprus was running out also on other issues, such as its intransigence over the (Turkish) north and its history of encouraging tax evasion," said Josef Janning, a political scientist at the German Council on Foreign Relations, an independent think tank in Berlin. Cyprus has refused to budge in long-running negotiations to find a political solution for the breakaway Turkish north of the island, which Nicosia refuses to recognize.

Germany's Frankfurter Allgemeine Zeitung newspaper, a conservative paper widely read in government and business circles, accused Cyprus on Thursday of trying to blackmail the European Union and warned that if it succeeded, other countries such as Greece, Portugal, Spain, Italy and Ireland might follow suit.

"If this strategy of blackmail in Cyprus works then there would indeed be a domino effect," the paper said in an op-ed. "The basis of the entire rescue policy, which can be summed up in the idea that solidarity entails (economic) solidity, would lose credibility."

In Spain, Prime Minister Mariano Rajoy didn't mention Merkel or Germany but criticized the plan for Cyprus in comments to reporters, saying he was "opposed to people losing their savings, because they are not in any way responsible in this matter."

Experts said Spanish politicians are nervous about the impact of the Cyprus deal, but not in panic mode at this point.

"Due to the numerous economic differences between the two countries, we have not yet seen serious spillovers in Spain due to this deal. However, the fear is that this deal could lead to an overall loss of confidence in Spanish banks, which in turn could lead to future political problems," said Morten Olsen, an economics professor at the IESE Business School in Madrid.

In an interview with the Frankfurter Allgemeine Zeitung, Russian Prime Minister Dmitry Medvedev appeared keen to highlight the EU's failings in Cyprus, accusing the bloc of behaving "like a bull in a china shop" and likening the levy on savings accounts to the Soviet system "which robbed the population without much fuss."

Editor’s Note: Put the World’s Top Financial Minds to Work for You

© Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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