Euro crisis: After the Cyprus bank raid fiasco, Germany is being painted as the EU’s chief villain

It’s easy to see why German taxpayers have had enough, argues Mats Persson. But the Cyprus bailout has ended with their government being painted as the EU’s chief villain - an accolade that should belong to the architects of the euro.

 
A banner featuring Angela Merkel dressed as German soldier during an anti-bailout rally in Nicosia 

In the running blame-game that is the eurozone crisis, Germany has now emerged as the chief villain. In many parts of Europe, the country has been outright blamed for the Cypriot crisis, which saw Berlin demand that Cypriot depositors be taxed in return for a €10bn bailout.

A commentator in Spanish daily El Pais went the furthest. “Like Hitler,” he wrote, “German Chancellor Angela Merkel has declared war on the rest of Europe.”

The piece was quickly withdrawn but the damage had been done. In Britain, commentators across the political spectrum have lined up to criticise Germany. The New Statesman recently labelled Merkel “the biggest threat to global order and prosperity” - ahead of notorious dictators such as Iran’s Mahmoud Ahmadinejad and North Korea’s Kim Jong-un.

Most comments have been far more level-headed but anti-Germany sentiments have reached levels not seen in a long time. Within Germany itself, however, the decision to tax Cypriot depositors continue to enjoy wide-ranging support, as does the wider austerity-driven approach to the crisis.

What’s more, many Germans would echo the country’s justice minister, Sabine Leutheusser-Schnarrenberger, who called on the EU to “also display solidarity with us and defend the Germans against unjust accusations”.

So are the accusations levelled against Germany unjust? Clearly, to consider taxing smaller Cypriot depositors — pensioners, unemployed, students — was an enormous mistake. Even though it was the Cypriot government itself, not the Germans, who insisted on spreading the burden beyond the larger depositors, it was obvious that it was too politically explosive to stand and that Germany would get the blame. Mrs Merkel’s government should have seen that one coming.
However, leaving aside that blunder, it is easy to see why German taxpayers have had enough. Throughout this crisis, risk has constantly been transferred away from private creditors on to the balance sheet of taxpayer-backed institutions. After two bailouts, Greece’s public debt is now around 70 per cent owned by eurozone taxpayers, with investors and banks largely let off the hook.
This is particularly hard to swallow in Germany as it comes down to broken promises. In the 1990s when the single currency was forged, German taxpayers were given two cast-iron guarantees: you will never have to bail out another eurozone country, and the European Central Bank will never enter the realm of politics by propping up insolvent governments.
To reassure the Germans, a “no bailout” clause was cemented in the EU treaties, explicitly stating that one eurozone country “shall not be liable for” the debt of another. Time and again, the Germans were also promised that the European Central bank would be the heir to the universally trusted Bundesbank.
“There is no bank in the world as independent from politics as the European Central Bank”, said Wim Duisenberg, the first president of the ECB, at the time.
Some 15 years and several bailouts later, German exposure through various loans and liabilities to weaker eurozone countries — including via the ECB’s government bond-buying programme - tops a nerve-rattling €1 trillion.
With Cyprus, the German government finally drew a line in the sand. Wary of dragging the electorate kicking and screaming into yet another hugely unpopular bailout, Berlin was determined to let Cypriot banks, not German taxpayers, pay most of the bill.
Germans are often accused of being obsessed with seeking to export their rules-based system for trade, taxation and spending — “Ordnungspolitik” — to the rest of the EU. This, critics say, lead to an unhealthy emphasis on austerity, locking the Mediterranean into high unemployment and permanent recession.
However, though the debate about when and how deep to cut is legitimate, the basic premise behind a rules-based order is one with which many Brits would sympathise. There are three main factors driving Germany’s attempt to instil this, and none of them is about seeking domination.
First, whether involving government or banks, the actual risk-takers must be made liable. If the bill for the mistakes made by banks or governments is constantly passed on to German taxpayers, what incentives are there for reform and to avoid even greater costs to German taxpayers down the road?
Cyprus sits on one the most bloated financial sectors in the world, seven times larger than the country’s entire economy. Foreign wealth was lured to Cyprus through generous interest rates and lax rules. It was a high-risk environment.
The head of the Eurogroup and Dutch finance minister Jeroen Dijsselbloem faced a barrage of criticism when he said last week that so-called “bail-ins” — forcing shareholders and large depositors rather than taxpayers to take the hit when banks fail - should become the norm in the eurozone.
The comments sent shockwaves through financial markets, as investors feared Spanish or Italian banks might be next in line, but were largely endorsed in Germany. Uncertainty around Cyprus was already plentiful so the timing was terrible, but the sentiment of the comments was absolutely right: “where [banks] take on the risks, [banks] must deal with them”, as Dijsselbloem put it.
The second driver is Germany’s own experience. It was the combination of rules and reforms that allowed Germany itself to rise from the ashes following the Second World War, and later to bounce back from the hugely complex reunification of East and West Germany. If it worked for Germany, why not for the rest of the eurozone?
Within the context of a monetary union, British commentators are right that there’s an element of inconsistency in this reasoning: the eurozone cannot consist of 17 Germanies (where would German exports go, for example?).
However, Anglo-Saxon scepticism over the single currency obscures a wider point: the German model of sound money and living within one’s means has a lot going for it. Some of the best-functioning economies in Europe — such as the Nordic countries — draw heavily from German economic thinking.
Swedish finance minister Anders Borg is arguably more suspicious of the eurozone’s habit of passing debt around — including from banks to governments - than are even the Germans. Sweden remains a rare success story of how to deal with bust banks.
But there is also a third, and more fundamental, reason why the Germans fear the prospect of perpetually underwriting the rest of the eurozone: they can’t afford it. Though we like to think of Germany as an economic power-house, according to a new Bundesbank study the assets of average households in Spain and France are significantly higher: €285,000 and €229,000 compared with €195,000 in Germany. In addition, as German politicians are keen to point out, if “implicit debt” - such as the liabilities of social security systems - are taken into account, the real level of Germany’s debt would be 192 per cent of GDP — much higher than Italy’s 146 per cent of GDP.
Germany faces a demographic time bomb. By 2050, the country’s current population of 82 million will have declined to around 70 million - less than the population in 1963. Far fewer will have to work for many more to finance the country’s pay-as-you-go social security system.
This deep-rooted sense of lingering economic vulnerability, alongside a genuine belief that Europe must learn how to live within its means, is driving Germany eurozone policy, not the desire to dominate Europe that some claim.
Regardless, it is clear that two vital pillars of Germany’s post-war policy — commitment both to Europe and to sound money - are now clashing head on. This is fuelling frustration. As the German tabloid Bild put it, as thanks for coming to the rescue of others Germans are met with “criticism and even open hatred”.
Perhaps it’s not surprising, therefore, that this month saw the launch of Germany’s first anti-euro party, Alternative für Deutschland. According to a recent opinion poll, about 26 per cent of Germans say they “could imagine” voting for such a party — with a disproportionally high share amongst first-time voters.
Mats Persson is the director of Open Europe, an independent think tank that campaigns for EU reform.