Archive for the ‘ Euro Crisis ’ Category

Balancing German Power in Europe

Growing German power in Europe and the divisiveness and resentment that it generates have become one of the main topics in European politics. Curtailing German power was in many ways a founding principle for Europe. Alas, recent events in Cyprus and the bailout deal, lead by Germany, involving haircuts for Cypriot depositors as a form of a bail-in (the original idea for a bail-in did not involved depositors), are calling the balancing of German power and European interests into question.

The traditional balancing mechanisms are no longer in place. Britain is not a member of the Euro and thus sidelined. Italy and Spain are in financial distress and dealing with austerity measures. France, traditionally the intellectual leader of Europe, under Francois Hollande is no longer playing an equal role to Germany.  Michel Barnier, EU internal market commissioner, does not counterbalance German influence in the way Jean-Claude Trichet did during his tenure at the ECB.

This is a dangerous situation for Europe and calls into questions basic European ideals and principles. Germany’s financing of Europe in return for making and enforcing the rules can lead to a dangerous self-fulfilling prophecy and may create a downward spiral in European politics and policy-making. The long-term success of the European Union requires a balancing of interests. Germany has to find a way to support Europe without overreaching.

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Political opportunism in Germany deepens the gap in trust and political cultures between northern and southern Europe

Before the Euro crisis it was considered politically incorrect, even xenophobic, to suggest that standards of probity in public life vary widely across Europe. For an institution dedicated to an “ever closer union” this notion is a problem.
The bailout deal for Cyprus (right after balancing the German budget -while its southern neighbors are struggling with austerity measures) demonstrates the dangerous shifting in public perception. The deal is the product of rather short sighted political opportunism in Germany with really bad timing.
Haircuts for Cypriot depositors (wiped out junior bonds added up to only $2,5 bil.) may turn out to be particularly problematic. The Euro crisis may be back with a vengeance if Italian, Irish, Spanish, Greek, and Portuguese depositors withdraw their funds to avoid the risk of unwanted future haircuts. Can German politicians sell future bailouts to the German public? If bond markets react unfavorably, future bailouts could be substantially larger than the $10 bil. bailout for Cyprus.

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