The Cyprus bailout controversy in German media and politics

We want to summarize reactions among politicians and German press views. The Eurogroup set up the details of a EUR 10 billion bailout package for Cyprus on Saturday, 16 March. This programme was heavily criticized in Germany, especially due to the tax on deposits below EUR 100 000. Yet, the Cypriot Parliament voted against this measure on Tuesday which is widely perceived as blackmail in Germany. Most commentators insists that Cyprus needs to come up with the agreed EUR 6 billion in order to receive the remaining sum from its European partners.

According to the Süddeutsche Zeitung, German Chancellor Angela Merkel’s (CDU) regrets the decision of the Parliament all by underlying the importance of guaranteeing deposits below EUR 100 000. However, investors above this threshold should contribute to the aid package and the banking sector should not be spared. She now asks Cyprus to come up with alternative solutions: “We will see now, which propositions Cyprus will make to the Troika”. During an event of the DIHK (German Chambers of Commerce and Industry) she added that there will still be some “tough discussions”.

The FAZ writes that Rainer Brüderle, chairman of the FDP parliamentary group, considers the possible consequences for the euro zone of a Cypriot bankruptcy as manageable.
German Finance Minister Wolfgang Schäuble said to the FAZ after the vote of the Cypriot Parliament that the stability of the euro zone is not in danger.

The German opposition, the SPD and the Green Party (Die Grünen) accuse Angela Merkel to be partly responsible for the situation.
According to Spiegel Online, Sigmar Gabriel, secretary general of the SPD, accuses Chancellor Merkel to be responsible for the “Cyprus disaster”. “Angela Merkel allowed that a country with a few more inhabitants than the Saarland plunges the entire euro zone into chaos”. Gabriel says that it was not only German Finance Minister Schäuble, but also the Chancellor leading the discussion of the euro summit. He says that Merkel allowed that, for the first time in the euro crisis, depositors would be “virtually expropriated”. Spiegel Online writes that as for all euro discussions, these are party tactical considerations. Merkel could depend on the votes of the Social Democrats in the case of a vote in the Bundestag about aid of the European Stability Mechanisms (ESM).
The finance political spokesman of the German Green Party (Die Grünen), Gerhard Schick, also told the FAZ on 21 March that Angela Merkel is partly responsible for the chaos regarding the rescue of Cyprus.

According to the FAZ on 21 March, CDU politicians rejected criticism towards Merkel; the budgetary spokesman of the CDU, Norbert Barthle, said that it was Cyprus’ irresponsible tactical maneuvering   that lead to the current crisis, and not Merkel’s position during the discussion in the Eurogroup.

The German government states on Tuesday 21 March its official position to the current situation. Reuters reports that the German Finance Ministry underlines two pre-conditions for aid to Cyprus. A spokesman of the Ministry told Reuters that crucial for a aid programme for Cyprus would be debt sustainability and the reduction of risks that stem from the over -dimensional banking sector.
 “The programme must be credible in order to solve Cyprus’ problems in the long run.” This means structural reforms, consolidation of the national budget, improvement of the income basis of the government and fighting money laundering.

Despite the dissents between the German political parties, financial experts of all parties criticize the approach of the ECB in the solution of the Cypriot crisis.
Klaus-Peter Willsch (CDU) told Handelsblatt Online that the ECB “favours delayed filing of insolvency and puts pressure on politics”. By providing only a temporary liquidity, the ECB presumes the intervention of the “Euro rescuers” via mechanisms such as the ESM.
FDP financial expert Frank Schäffler asks the ECB to immediately stop providing liquidities to the Cypriot banks: “Insolvent banks in Cyprus must not be longer kept alive via the ECB”.
The German opposition takes the same positions regarding the ECB. SPD financial expert Carsten Schneider told Handelsblatt Online that “the financial crisis has to be solved politically “and not by printing money”, as wanted by Chancellor Merkel. Furthermore, he would like to see consequences of the current crisis regarding the future tasks of the ECB, in particular that a banking union will need a “separate resolution authority with a resolution fund financed by the financial sector.” 

Werner Mussler criticizes in the FAZ the ECB’s rescue politics. He says that the threat of ECB director Jörg Asmussen that the ECB would no longer provide Cypriot banks with liquidities if they did not approve the conditions of the international aid programme, is again a sign of the inappropriate EU rescue politics of the ECB. These politics aim notably at “buying time”. He writes that it is “irritating” how all political actors including Finance Ministers, ECB, Cypriot deputies as well as the German political opposition, “wash one’s hand of responsibility”. Especially the ECB cannot any more be without responsibility. “She was and she is right in the middle”.

Patrick Bernau writes in the FAZ on 21 March that the case of Cyprus represents a missed chance: for the first time bank creditors could have borne costs of a rescue. Instead, it is again up to the taxpayers to pay. He says that the initial solution would have been an example for Europe, provided that modifications regarding the burden-sharing would have been made, in particular that depositors with deposits below EUR 100 000 would be spared. Yet, the Cypriot government plans to bond patrimony of the church and pensions funds in order to obtain credits. Again, this solution implies that taxpayers would bear the main part of the rescue. However, this proposition has one advantage: Cyprus starts to gather funds on its own and does not require more money from its European partners. 

Jürgen Matthes writes in the Handelsblatt that Cyprus’ European partners need to be tough, because otherwise they would compromise the entire rescue strategy that is based on the fact that aid is tied to certain conditions. A drawback of the Eurogroup in the Cypriot crisis would give incentives to other EU crisis countries to follow the same strategy.  

Sven Böll writes on Spiegel Online on the shortsightedness of the arguments that have been used during the crisis. If Cyprus went bankrupt, this would have the consequence of Cyprus leaving the euro zone in order to finance their banking sector. This exit would infringe a taboo for the euro zone and, in any case, this would be bad news for the monetary union. Moreover, Germany can only loose of a Cypriot exit; this would trigger a capital flight in countries such as Italy, Spain and Greece and the financial markets would loose their confidence in the euro zone. This would result in very bad conditions for Southern European countries to borrow money; in the extreme case they would have to go back to their national currencies. These would appreciate in respect to the Euro and the value of German assets in these countries would decrease. Nevertheless, that does not mean that the Cypriots have the right to blackmail Germany. The Cypriot politicians are responsible for the mistakes made in the past and their wrong estimations in the present. A monetary union is a “community of fate”, a victory on somebody can quickly transform into a defeat.