December 4, 2020

Cyprus Bailout Backlash Promises Crucial Test for Germany

The backlash in Cyprus and, indeed, around the world has prompted fresh concerns about solidarity in Europe and the ability of the currency union to hold together in the long run with such divergent economies and public interests.

If, despite the controversy, the bailout deal for Cyprus remains contained to the small Mediterranean island, with no significant implications for the rest of the euro zone, it could prove a validation of the German approach. However, a further fracturing of euro zone unity could show once and for all that Germany and its disciplinarian allies have overplayed their hand.

Chancellor Angela Merkel of Germany has thus far set the tone in Europe, wielding the country’s overwhelming economic strength and influence to ensure that austerity and budget consolidation dominate as the solution to a debt crisis now three years old. Recently, Italian voters sent a stiff rejoinder, rejecting the technocratic government of Prime Minister Mario Monti and giving more votes to the protest party of a comedian and even to the party of Ms. Merkel’s bête noire, former Prime Minister Silvio Berlusconi.

The struggles of ordinary savers in Cyprus strike a chord that resonates not only in Southern Europe but also here in Germany. The image of Cyprus within Europe and worldwide has quickly flipped from that of a shadowy refuge for Russian money launderers to the home of honest pensioners whose accounts are being raided to pay for banks’ missteps.

“It’s difficult to see how Germany comes out of this one strengthened,” said Jacques Cailloux, chief European economist at Nomura, the global investment bank, in London. “There is a point at which the conditionality they impose is so stretched that the other countries are not going to sign up for it anymore.”

Even after the Cypriot president, Nicos Anastasiades, revised the terms on Tuesday morning to exempt depositors with less than $26,000 in their accounts, Parliament rejected the bailout deal on Tuesday night, as Cypriot protesters demonstrated in the streets with anti-German banners. But German officials have not backed down, saying essentially that Cyprus has no choice but to come up with billions to cover its side of the deal.

“As long as there is no program, the liquidity assistance for the Cypriot banks is endangered,” said a German government official, speaking on condition of anonymity on Tuesday because the negotiations had not been completed. “That’s difficult,” the official added, “but that’s the situation.”

Many in Germany still advocate the hard line on bailouts that the government has taken, with the support of allies like the Netherlands, Finland and Slovakia. “We can’t go on the way we have been,” said Tilman Mayer, a professor of political science at the University of Bonn. “We have to set an example or this could know no bounds.”

The cynical reading is that Ms. Merkel has stayed tough out of concern for her re-election chances in September’s parliamentary elections. “The rescue package for Cyprus is written in the handwriting of German domestic politics,” said Thomas Poguntke, professor of comparative politics at the Heinrich Heine University in Düsseldorf. “But taking the savings breaks a taboo.”

Along with the International Monetary Fund and the European Central Bank, the Germans are sticking to the principle that countries that mismanage their banks and government finances must endure pain as the price of financial help — even if ordinary citizens are the ones who suffer.

Christine Lagarde, the managing director of the International Monetary Fund and one of the officials who worked out the Cyprus plan in Brussels last week, said Tuesday in Frankfurt that she was in favor of changing the plan to burden ordinary depositors less. But she quickly added that Cyprus would still need to contribute $7.5 billion to the bank rescue, as promised.

“Now is the time for the authorities to deliver on what they have committed,” Ms. Lagarde said.

Nicholas Kulish reported from Berlin, and Jack Ewing from Frankfurt. James Kanter contributed reporting from Brussels.

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