Monday, March 18, 2013

Cyprus, power politics and banking union

The forced bail-in of depositors in Cyprus (a.k.a. taking away between 7 and 10 percent of depositors' savings) to fund part of the country's bailout is likely to be the first shot in the move toward a more consolidated banking system in the EU, but not the way that proponents of banking union envisaged it. In the Commission's plans, the market would be opened up for banks to merge and acquire one another until fewer were left standing and banks by nature served customers across Europe's national borders. But banks, regulators and garden variety depositors have kept within their national borders since the crisis began.

The Cyprus deal changes all that. Although the EU maintains that Cyprus is a special case, Germany maintains that the deal is to ensure that a restructuring of a country that goes bankrupt (even indirectly, to keep its banking sector afloat) costs German taxpayers nothing. That means it isn't an isolated event. Deposits in program countries are under direct threat, and there will be no warning, other than the prospect that a national government will need to reach out to the EU for help.

That means that depositors who have savings and wish to protect them will have to seek safe havens. That means the core countries of the northwestern European Union, at least within the EU. Capital will run. The choice between EU transfers coupled with harsh conditions to prop up the banks and allowing banks in the EU's periphery to be bought up by competitors will grow.

Germany's Chancellor, Angela Merkel, has a long history of playing power politics ruthlesslessly, identifying the competition's weakness, and waiting until the right moment to spring the trap. No one wanted a banking union that would open up a war between the EU's strongest states. But the program countries?

As Thucydides once said, the strong do what they can. And the weak do what they must.

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