The latest drama in the eurozone marks a watershed
In Europe's 40-month struggle to save its currency from crashing banks, fiscal incontinence and ballooning debt, this weekend's drama in Nicosia and Brussels marks a watershed. In many ways.
Never before have bank account holders seen their savings raided to help finance a bailout. Never before have a country's banks had to be closed down for 10 days, at least, to prevent a bank run. Never before have capital controls been imposed to contain a crisis and prevent capital flight. Never before have the governments of the eurozone agreed the terms of a bailout, only to scrap it 48 hours later and then engage in an unseemly blame game.
And never before has Germany appeared so determined to make an example of a eurozone country, all the way to the euro exit, unless it does what it is told. If Cyprus's latest scheme to merit a €10bn bailout does not pass muster, the ECB will be under pressure to come good on its threat to order a halt to liquidity aid to Cyprus's banks on Monday, bringing the island's financial sector to its knees, leaving the country insolvent, and probably heading for the euro door marked way out after only five years in the currency.
It is the eurozone's fifth bailout in three years. But this time it is different. Since the beginning of the year, Berlin has been insisting that Cyprus is not "systemic", in other words that a Cypriot crash could be contained, with minimal impact on the rest of the eurozone. This view has caused friction with the ECB and the European commission in Brussels which argues that every euro country is systemic.
Angela Merkel, the German chancellor, takes the view that the Cypriot financial and economic model is rotten to the core, needs vital overhauling if it is to be saved and that Germany is not going to send its taxpayers' money to secure the low-tax, high-risk investments of Russian squillionaires dominating the bloated Cypriot financial sector.
There are many reasons for the Cypriot debacle. A major one stems from a 2010 meeting in Deauville, Normandy, during which Merkel persuaded former French president Nicolas Sarkozy that private bank creditors in Greece should take a "haircut" as part of the Greek bailout.
That triggered a long fight between Berlin and Frankfurt, the German government and the ECB. As usual, Merkel prevailed, though privately she has conceded it was a mistake not to be repeated. Last year, when Greece's private bank creditors were forced to take losses as part of a new bailout, Cypriot banks, heavily involved in Greece, suffered hugely, making a Cypriot bailout inevitable.
Before a September general election, Merkel will not soften her stance on Cyprus, even if it means it has to be sacrificed. "Too small to matter" is the new "too big to fail". No one knows if she is right.
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