Cyprus Catastrophe
When news of the Cyprus bailout trickled through to Berlin on Saturday morning, bearing with it the potentially alarming news that bank depositors would be “bailed-in” to share the cost, the German reaction was very positive.
Politicians from both left and right agreed that without such a deal, the rescue would not have a hope of winning approval in the Bundestag. Wolfgang Schäuble, finance minister, had done a good job, they admitted.
At €10bn, it is a far smaller programme than previous ones for Greece, Ireland and Portugal. But the German body politic is pretty well united in insisting that a bail-in of creditors must be part of any bailout by taxpayers.
Some misgivings have now emerged about the burden falling on savers in Cyprus, and not just on the big depositors with more than €100,000 in the bank. But the underlying principle of burden-sharing is not in question.
This time round, however, it is the opposition Social Democratic party that has been making the running in setting tough conditions for the rescue programme, and not hardline members of Angela Merkel’s ruling centre-right coalition.
Hitherto, the SPD has tended to criticise Ms Merkel and her government for being too mean and hesitant in bailing out its debt-laden eurozone partners – and then vote in favour of the deals in the Bundestag. Along with the environmentalist Greens, the Social Democrats have backed all the programmes for fear of aggravating the financial crisis and spooking the markets. Such responsible behaviour has not won them any votes, and it is a German election year. But Cyprus could be different.
Thanks to the peculiar situation of the Cypriot banking sector, swollen to some eight times the size of the island economy with foreign deposits, they have had a chance to seize the moral high ground from the government – at least in terms of the popular German debate.
Both SPD and Greens declared that Cyprus must abandon its current “business model” of providing a tax haven for wealthy Russian depositors, in particular, before they would approve any rescue.
The idea of a “haircut” for uninsured depositors came from the SPD. It also insisted that corporation tax should be increased from the minimal rate of 10 per cent, and Cyprus should join Germany, France and other eurozone countries in introducing a financial transaction tax.
On Monday, Sigmar Gabriel, SPD chairman, ruled out once again any use of the €500bn European Stability Mechanism to recapitalise Cypriot banks directly – the only real alternative to the levy on deposits. It would be “illegal” according to the ESM law approved in the Bundestag, he said. Only once a fully-fledged banking union was in effect, with strict common banking supervision, might any change in the law be contemplated.
It is electioneering, up to a point. Previously, Ms Merkel has won broad popular support by combining a pro-European stance with strict insistence on bailout conditions to protect German taxpayers: solidarity in exchange for solidity. It has left no room for manoeuvre for the SPD.
In 2011, Peer Steinbrück, now SPD challenger for Ms Merkel’s job, and Frank-Walter Steinmeier, parliamentary leader, published a joint article in the Financial Times calling for limited use of eurozone bonds to ease the debt crisis. Last year, Mr Gabriel backed a similar idea for “mutualising” debt, by setting up a debt redemption fund.
Neither idea has been dropped formally, but neither is being promoted any more: Ms Merkel has made the idea of debt mutualisation electoral poison, according to one frustrated SPD Europe specialist, who favours such schemes.
With six months to run, the German election campaign has reinforced a deep-seated national conviction that moral hazard must be avoided by forcing private investors to share the costs of failure with taxpayers. The prospect of an anti-euro party running in the election, the newly-founded Alternative for Germany, will also make the big parties cautious about sounding too lax with taxpayers’ money, even if it is unlikely to pick up many votes.
If the election were to produce a “grand coalition” of SPD and Ms Merkel’s Christian Democratic Union in September – still mathematically the most likely outcome – the future government is not likely to ease any bailout conditions for its partners. Solidarity in exchange for solidity will still be the national slogan.
By Quentin Peel
This article originally appeared in the Financial Times.
Category: Featured, International
