Ruth Lea, economic adviser to the Arbuthnot Banking Group, sees Cyprus continuing to play the role of a thorn in the Eurogroup's side, amid ongoing concerns over the pace of eurozone economic recovery.
The confused messages surrounding the Cyprus deal, have additionally cast major doubts on the eurozone’s progress to banking union. It was agreed at last June’s summit that the objective of banking union was to “break the vicious circle between banks and sovereigns” by entrusting financial supervision and crisis management to common authorities. And, as already commented, the Single Supervisory Mechanism was agreed last December. Progress seemed to have been made. But a key issue in banking union remains the use of the common rescue funds (the ESM) for recapitalising troubled banks directly, to which the Eurozone leaders have committed once a single supervisor is in
place. Such recapitalisation would ensure that the burden of supporting weak financial institutions would not fall on weak sovereigns. Moreover, the Eurogroup is supposed to be drawing up rules for such direct recapitalisation by June. But Dijsselbloem seemed to be all but repudiating this commitment, doubtless supported by Germany which has consistently expressed reservations about banking union ever since it was first mooted. The Economist reported that in the view of one gloomy Eurocrat, “we are digging the grave of banking union.”
Another political implication of the Cyprus deal was the IMF’s new tough stance. When the eurozone crisis began in 2010 the IMF, led at the time by would‐be French presidential contender Dominique Strauss‐Kahn, waded in with enthusiasm. The IMF arguably lent Greece much more than it normally would have done against an unrealistic fiscal plan. Many commentators, not least of all the IMF’s developing nations, asked why the IMF was risking so much on questionable programmes for rich European countries. The IMF, arguably, should have left the eurozone, a rich man’s club by international standards, to sort out its own, self‐inflicted problems. In contrast with 2010 the IMF was noticeably tough in the talks over Cyprus, acting in its familiar role of stern disciplinarian.
Our final political development concerns possible knock‐on effects on other weak eurozone members. The next in speculative line has been Slovenia and the speculation that Slovenia might follow Cyprus in applying for a large EU and IMF‐bailout. Suffice to say at this stage, Slovene bankers, business leaders and politicians have closed ranks to dismiss what they regard as “hysteria”. In
addition, Portugal’s constitutional court recently rejected key austerity measures (4 April), halting about €1bn of a planned €5bn package of cuts, putting pressure on Portugal’s creaking public finances. Eurozone tensions are likely to shift to Portugal after this significant decision.
Concerning the economic implications for Cyprus of the major retrenchment of its over‐sized Russian‐involved banking sector, there will probably be a dramatic economic slide in the near future. There is speculation that GDP may fall by 20% over the next two years, making the deficit reduction targets completely unrealistic.