The Eurogroup's new president and the Netherlands' Prime Minister, Jeroen Dijsselbloem, has taken to his role like a bull in a china shop. Speaking about the recent Cyprus bailout agreements, Dijsselbloem hinted that the Cyprus bailout structure would pave the way for similar actions in other European countries. Specifically, banks, shareholders and holders of non-guaranteed deposits might have to all take responsibility for recapitalizing struggling banks. The statements crushed stock markets across Europe as early-morning optimism faded.
Dijsselbloem also said that if the bailout strategy used by Cyprus is applied to other European nations, then it would not be necessary to use the European Stability Mechanism, which is a fund created to provide direct bailout funding for at-risk European banking sectors. Dijsselbloem's statements were irresponsible and unpardonable. It seems like he wants to blow up the euro and the region's fledgling centralized banking regulation. Markets dropped quickly after the statements, and risk premiums in Spain and Italy spiked as the euro fell below $1.28 -- its lowest point since November.
It is alarming that a high EU official cannot monitor his words and forgot his promise to find tailor-made solutions for each European nation. Not it seems like he is going against banking unity. The worst part of the issue is that the rules of the game have been broken once again. In its first proposal to provide aid to Cyprus last weekend, the EU threatened the securityof the law when it decided not to levy money from deposits greater than 100,000 euros -- a guarantee accepted by all member states to protect savings accounts against a market failure. The EU has yet to recover from its mistake of telling citizens and investors that deposit gaurantees will very from one state to another within the euro zone. The latest words from the Eurogroup president, who is forgetting that ING received 25 billion from the Netherlands and that banks in Great Brittain, France and Germany received aid at the beginning of the crisis.
The future is uncertain for Cyprus. It will never be a tax haven again, which will cripple a major component of a stalled economy that was already near collapse. Unemployment will increase and the gap between the rich and poor will widen. The overall economy will needs years to recover. It will be easier to impose controls on the way money moves around the island than to raise money, because a lot of capital is fleeing the country. The clumsy nature of this bailout is increasing fears about a potential contagion throughout the rest of Europe. A memorandum signed by the EU protects Spain by ensuring its financial sector will get the aid it needs. Spanish banks are meeting their requirements and, if an climate of extreme instability rises, then they could ask for the rest of the money available to them. But we should not forget that Spain and other euro zone nations will now look less attractive to foreign investors. Companies from other countries currently operating in the euro zone will want to have accounts with other foreign banks because of the risk that the EU has created for their deposits. Fresh doubts are the price we are paying for continual contradictions from euro zone leaders, and they ought to give some explanations.
