Bailout implications

The ink on the plan to save Cyprus hardly had time to dry before Jeroen Dijsselbloem, current head of the Eurogroup, suggested the Cypriot bailout deal forcing losses on big depositors at the country's two largest lenders could become a model for future European bank rescue packages. His comment upset investors and triggered a stock market slump. While Dijsselbloem later attempted to retract the comment saying he was misquoted, speculation continues in the media and among experts whether the Cyprus bailout could in fact be, at least in parts, a template for other regions in the eurozone.

DW: According to Dijsselbloem, the Cyprus rescue marks a turning point in the fight against the debt and banking crisis in the eurozone. Would you agree?

Guntram Wolff: It certainly is a cut from the past. But I am not sure whether this is moving in the right direction. I believe Cyprus is currently in an extremely dangerous phase. There is a significant risk that Cyprus will exit the eurozone. In this situation, any unfortunate remark can add fuel to the flames.

Dijsselbloem created quite an upset when he indicated restructuring plans for Cypriot banks could serve as a model. He back-pedaled, but the suspicion persists that Dijsselbloem may very well have been serious.

No one knows for sure what he did or did not say, and in how far he was or was not misquoted. But the fact is that players on the financial markets had a strong reaction. Twenty-four hours after his remark, banks' equity prices had dropped by more than 25 billion euros in the eurozone. That means the remark had very negative and harmful consequences for the European banking sector. One must now verify whether he was misquoted or whether false statements were made.

Political pressure on the EU is huge. Many EU citizens say they do not want to have to pay for the mistakes made by other countries. Could the events in Cyprus influence the EU's future strategy after all?

It will certainly be necessary to get the banks more involved. Using taxpayers' money to help out banks throughout Europe is impossible. So there is some truth to the plan that banks must be more involved. But some remarks have gone too far. As I understood him, Dijsselbloem suggested that deposits could generally be debited to pay off debt. That is something that was neither agreed on as a role model for all of Europe nor would it make sense. Right now, we are looking at a highly dangerous tightrope walk. I do not believe there was a political consensus to say something like that.

A spokeswoman for European Union Markets Commissioner Michel Barnier in Brussels said Cyprus is a unique case. But that there should, at some point, be a situation in which the taxpayer is no longer asked to pay for the banks' mistakes. The statement shows a certain restraint regarding the transferability of the Cyprus rescue - and the EU's desire to relieve the taxpayer.

That is correct; but it is all about nuances that can easily amount to a difference of dozens of billions of euros. To call Cyprus a possible role model, above all in a situation like the current one where everything that could go wrong and went wrong last week, is very critical.

What would you say were the greatest mistakes?

The biggest mistake was the initial decision to tax deposits of up to 100,000 euros, without debiting senior creditors. That would have created a totally biased system.

Wasn't that a decision taken by the Cypriot government and not by the EU?

The negotiating partners on both sides all sat down together and discussed the matter. The European partners did not veto the plan to tax deposits of less than 100,000 euros, so they are partly responsible. They should have made it clear that the move not only threatens confidence in deposits in Cyprus, but confidence in all deposits.

The second very grave mistake - that was unfortunately at least implicitly confirmed by the Eurogroup on Monday morning - was the option to introduce capital controls. A currency zone with capital controls is no longer a currency zone. It would be an explosive situation indeed if the markets had the impression that capital transactions controls can be introduced. A bank run could hardly be prevented. In that case, the house of cards could collapse.

What lessons should the EU learn from the Cyprus case?

If the euro is really meant to survive, creating a banking union in the foreseeable future is vital - with a centralized supervisory board and a centralized restructuring authority that can intervene everywhere and that can restructure banks. If that had existed, we would never have had the Cypriot problem. In the short and medium term, we will have to bite the bullet if we want to hold the euro together. The European Central Bank (ECB) should be told that it must provide unlimited liquidity to maintain the payment system. If the ECB no longer does that, Cyprus is de facto out of the eurozone.

Guntram Wolff is an economist and deputy director of the Brussels-based Bruegel think-tank.