On Bloomberg there is yet another analysis of the potential consequences of the Cyprus-bailout. Among them is the damage this has done to the project of building a banking union and the potential for bank-runs whenever a country gets into trouble (Portugal comes to mind for this in the near term). To quote Ed Harrison:
My view? It was inevitable that we would be in crisis again. The austerity world view of crisis resolution is completely at odds with the capacity of the euro zone’s institutional architecture to handle a crisis. And so, we keep doubling down on the same policy of austerity in exchange for reforms which has created the downward spiral to begin with. I wish I could be optimistic here. But I think it is going to get worse. I hope I’m wrong. And I certainly hope that periphery depositors still have enough faith in the euro to ride this one out. If the Cyprus panic metastasizes, it will get ugly.
OK, politics is difficult, and I understand that Merkel wants a) to be re-elected, b) needs the Social Democrats for passing this bailout and c) Germans have a totally different view of economic reality and its solutions re: the crisis than what is sensible and (factually) true. But is clinging on to power and not telling voters the truth really so important to throw yet another economy under the bus? Like Yanis Varoufakis says, we need a benevolent hegemon (Germany) – see this post:
Germany should take another leaf out of the New Dealers who put it on the road to recovery all those years ago: Europe needs its own New Deal, funded by a new class of public finance instruments. Germany can realise such a Recovery Program centred around the European Investment Bank. The EIB already has a proven track record of creating a liquid market for debt instruments that fund successful projects. In collaboration with, and supported by, the European Central Bank, an EIB-ECB partnership has the capacity to energise mountains of hitherto idle savings on pure banking principles, with minimal involvement of member-states and no need for Treaty changes.
All it will take is a German resolve to shift from panicky authoritarianism to a hegemonic, to an enlightened self-interestedness.
But at the moment we are stuck with ‘panicky authoritarianism’ or maybe even plain stupidity or evilness in the view of a wrong understanding of what ails Europe. Germany wake up, we need you!