Euro may be doomed regardless of Cyprus

However the crisis in Cyprus is resolved, there will be lasting effects on the European Union that may well have sealed the fate of the euro.

After a brief respite with the markets focused on the U.S. Federal Reserve’s monetary policy meeting, the crisis returned to the forefront when the European Central

The rejection of a bailout requiring a tax on deposits by the Cyprus Parliament and failure to reach a new agreement forced the government to extend a bank holiday through the rest of this week.

Whether Cyprus manages to agree on a rescue and stay in the euro or not, however, this week has left a legacy that will continue to have an impact on the EU and its currency.

First of all, Europeans have learned that not even deposit insurance — the bedrock on which confidence in banks rests — is sacrosanct in the minds of Brussels officials.

No amount of declarations that Cyprus is unique will restore the trust in their banks for Italians or Spaniards or Portuguese when the crisis again reaches an acute phase in their countries, as it inevitably will.

Second, the willingness of Cypriot lawmakers to defy Brussels and vote down their proposal sets a precedent that will rally anti-austerity and anti-euro forces throughout southern Europe.

Mainstream parties in Greece and Italy and Spain that have toed the Brussels’ line will have to stiffen their spines or see their support eroded even further.

Most important, though, is that southern Europeans now have the clearest evidence so far that certain northern European countries view them as second-class citizens.

The small savers and pensioners that officials from Germany, the Netherlands, Finland and other countries were willing to penalize for the excesses of Cypriot banks are no guiltier of malfeasance than the small savers and pensioners in any of those northern European countries.

It is impossible to imagine that politicians in Germany, for instance, would dare to confiscate nearly 7% of the savings of their own citizens for any reason. But they were willing to do it to Cypriots.

“What we are witnessing is the slow death of the European Project,” Anthanasios Orphanides, the former head of Cyprus’s central bank, said in an interview with Bloomberg TV this week. “We are in a situation that some European governments are essentially taking actions that are telling citizens of other member states that they are not equal under the law.”

Orphanides, who worked as an economist at the U.S. Federal Reserve before his stint as central bank governor from 2007 to 2012 and who currently teaches at MIT, added that the Cyprus proposal endangered the banking union seen as necessary to preserve the euro by undermining confidence in deposit insurance.

“Indeed by making a mockery of that right now, the governments who pushed for this measure are sending a message that they want no part of a banking union,” Orphanides said.

The one political leader in Europe who had a chance in Cyprus, as in earlier turning points, to put things on a more solid footing and ultimately ensure the sense of solidarity needed to support a genuine European union is German Chancellor Angela Merkel.

But in following the dictates of domestic public opinion, Merkel has shown once again that, contrary to her declaration she would do everything to support the euro, the most important thing for her is winning re-election to a third term.

She may indeed win a third term in Germany’s national elections in September, and history will note the longevity of her tenure while giving her the lion’s share of the blame for the disintegration of the EU.

The whole basis for European integration after two destructive wars was to co-opt the powerful German economy into a shared prosperity.

Merkel’s short-sighted policies to shield Germany from taking responsibility for problems in a system Berlin largely designed and operated has resulted instead in a whole new generation of Europeans — for whom the wars of the 20th century are history — coming to distrust and resent the Germans once again.

Cyprus is a small country and whether it stays in the euro or instead becomes a full-fledged financial colony of Russia may not matter to a lot of people, but the way Brussels and Berlin have handled this crisis will matter to Europeans and financial markets for some time to come.

Πηγή: MarketWatch