What Next? Europe After Cyprus


What Next? Europe After Cyprus

How the events of last week have changed the euro crisis

The dust is still settling around the new Cyprus bailout. But already there are three significant developments that show us where Europe will go from here.

The first is that Jeroen Dijsselbloem has gone from being an unpronounceable name to one of the most hated men in Europe. Why? On March 25, Mr. Dijsselbloem, who chairs the group of eurozone finance ministers, said that the Cyprus bailout is a template that can be used in other countries.

Here’s the offending comment:

If there is a risk in a bank, our first question should be “Okay, what are you in the bank going to do about that? What can you do to recapitalize yourself?” If the bank can’t do it, then we’ll talk to the shareholders and the bondholders, we’ll ask them to contribute in recapitalizing the bank, and if necessary the uninsured deposit holders.

In our daily monitoring of the German press, we’ve sensed a hardening of tone and rhetoric throughout the crisis.
Open Europe
All eurozone countries guarantee the first €100,000 (us$128,290) in their nation’s bank accounts. Anything above that is “uninsured.” When Mr. Dijsselbloem says “we’ll ask” uninsured deposit holders to “contribute,” he’s saying that if Spain gets into trouble, those with more than €100,000 in the bank could lose their money.

Other European leaders have been doing all they can to get out the opposite message: Cyprus is a one-off. If Mr. Dijsselbloem is telling the truth, it would be madness to keep more than €100,000 in any bank in Southern Europe. But if people start taking their money out of Southern Europe even faster than they already are, as Dijsselbloem is encouraging them to, it could take the crisis to a whole new level.

As Business Insider put it: “Really, Dijsselbloem? Why would you say something like that?”

French President François Hollande and Spanish Prime Minister Mariano Rajoy have already contradicted him. Dijsselbloem has put out a statement that says—kind of—that he didn’t really mean what he said earlier, but it’s a fudge that has left everyone confused. The bottom line seems to be this: Europe is planning on repeating Cyprus, but it doesn’t want to spark a panic by making that too clear.

The second new development is the introduction of capital controls in Cyprus. Draft proposals leaked online indicate that Cypriots face tough restrictions on how they can use their money. Those traveling abroad can take only €1,000 ($1,282) at a time. An exception has been made for students, who can take €5,000 out of the country per quarter. Within Cyprus, each individual is limited to €5,000 ($6,414) in credit or debit card transactions a month. People may deposit checks into bank accounts, but cannot cash them.

According to the draft, these controls will be in place for seven days. But Cyprus is clearly planning to keep at least some of them in place for the long haul. What’s the point in detailing the amount of money students can take out per quarter, if the controls are only in place for seven days?

These capital controls will also encourage people to get their money out of Southern Europe. If you see a crisis approaching Spain, would you leave your money there and risk only being able to get it out of your bank a trickle at a time?

Dijsselbloem’s statement and the capital controls increase the divide at the heart of the euro. A German euro in a German bank account is becoming much more desirable than a Cypriot, Greek or even Italian euro. The euro crisis will move even faster from now on.

But the most important change is the change of attitude within Germany.

Think tank Open Europe reports that “the Germans themselves are remarkably united over the agreement.”

“In fact, the feeling is that Germany, collectively, just got a fair bit more assertive over its eurozone policy,” it writes.

Germany’s Social Democrats and Greens will join the government in supporting the deal. “In our daily monitoring of the German press, we’ve sensed a hardening of tone and rhetoric throughout the crisis, not least in response to the overtly anti-German tone of many of the anti-austerity protests in the south,” writes Open Europe.

Thomas Straubhaar, director of the Hamburg Institute of International Economics, called the bailout deal a “turning point” in Die Welt. “Up until now, the bankrupt countries have been able to use fear of a domino effect to extort Europe,” he wrote. “That is now over because the strong eurozone countries have the better hand—and they should not be afraid to play it” (translation by Open Europe).

The think tank concludes: “The implications of a Germany more prepared to assert its viewpoint has huge implications for the future of the eurozone and the EU as a whole.”

It’s right. As a result of Cyprus, the eurozone is a lot more volatile, and Germany is more assertive.