Category Archives: European Union

Belgium, European Union

Remembering the legacy of former Belgian PM Wilfried Martens

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Wilfried Martens, a longtime Belgian and European statesman, died last Wednesday night at the age of 77, and though it’s still been a few days, it’s worth pausing to consider his legacy to his country and his continent. Belgium FlagEuropean_Union

While European Commission president Jacques Delors, French president François Mitterrand and German chancellor Helmut Kohl all receive much of the credit for bringing about the modern-day version of the European Union and the single currency, Martens played a crucial role in boosting ever closer union, appropriately for someone who grew up in the aftermath of World War II in poverty in Ghent.

Between 1990 and 2013, Martens served as the leader of the chief center-right grouping in the European Parliament, the European People’s Party.

Belgium today seems to be virtually ungovernable amid splits between the Dutch/Flemish-speaking Flanders in the north and the French-speaking Wallonia in the south — the country famously went 589 days without a government between 2009 and 2011.  Martens’s death draws a bright line against an era when Belgium, as a unitary state, was still governable, if something less than stable.  The always-nimble Martens himself led nine different coalition governments of varying regional and ideological tilt between 1979 and 1992, becoming Belgium’s longest-serving postwar prime minister:

The crisis [that brought Martens to power] was the result of fundamental divisions between the coalition government’s Socialist and Christian Democrat parties over how to tackle economic problems, a burgeoning welfare deficit and the long-term decline of Belgium’s traditional heavy industries. This, together with growing tensions over the country’s regional and linguistic divide between Flemish and French speakers, formed long-running threads in his premiership and resulted in the sequence of shifting coalition allegiances over which Martens presided, as he came to be seen as the indispensable leader, the only man capable of holding factional governments together.

He achieved this balancing act with skill – not least in the face of opposition from some more senior ex-prime ministers – though King Baudouin must have become used to his regular trips to the palace to offer his resignation.

Economic crisis forced Belgium into undertaking many of the structural economic reforms that Germany and Sweden endured in the 1990s (under varying circumstances) and that much of Mediterranean Europe seems destined to enact at even more painful costs today.  Though Martens came to power as a Flemish nationalist, he governed as a Belgian federalist — he helped craft a new constitutional arrangement that made Belgium a much more federal state, in which many powers are devolved to either the Flemish or Walloon regional governments.

If you’re paying attention in Madrid and London (and Barcelona and Edinburgh), the lesson of Martens-era Belgium is that even when Spain and the United Kingdom manage to return to healthier economic conditions, the Catalan and Scottish independence issues won’t necessarily retract. Continue reading Remembering the legacy of former Belgian PM Wilfried Martens →

European Union, Norway

Despite the success of pro-EU parties in Norway, don’t expect EU membership anytime soon

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EUnoray

One of the odder results of this week’s Norwegian election is that while it boosted the numbers of seats for the two parties that are most in favor of membership in the European Union, Norway is today less likely than ever to seek EU membership.European_Unionnorway

Together, the center-left Arbeiderpartiet (Labour Party) and the center-right Høyre (the Conservative Party) will hold 103 seats as the largest and second-largest parties, respectively, in the Storting, Norway’s 169-member parliament — that’s a larger number of cumulative seats than the two pro-European parties have won since the 1985 election.

But EU membership is firmly not on the agenda of Norway’s likely new prime minister, Erna Solberg, just like it wasn’t on the agenda of outgoing  prime minister Jens Stoltenberg during his eight years in government.

One of the obvious reasons is that EU membership is massively unpopular among Norwegians — an August poll found that 70% oppose membership to just 19% who support it.

Proponents of EU membership argue that because Norway is part of Europe’s internal market, it is already subject to many of the European Union’s rules. (Norway is also a member of the Schengen free-travel zone that has largely eliminated national border controls within Europe)  But until Norway is a member of the European Union, it has absolutely no input on the content of those rules.  Stoltenberg (pictured above left with European Council president Herman Van Rompuy) has called the result ‘fax diplomacy,’ with Norwegian legislators forced to wait for instructions from Brussels in the form of the latest directive.

Since 1994, when Norwegians narrowly rejected EU membership in a referendum, Norway has been a member of the European Economic Area (EEA), an agreement among the EU countries, Norway, Iceland and Liechtenstein that allows Norway and the other non-EU countries access to the European single market.

Opponents argue that Norway, with just 5 million people, would have a negligible input in a union that now encompasses 28 countries and nearly 508 million people.  They also argue that with one of Europe’s wealthiest economies, Norway would be forced to contribute part of its oil largesse to shore up the shakier economies of southern and eastern Europe.  There are also sovereignty considerations for a country that didn’t win its independence from Sweden until 1905 — and then suffered German occupation from 1940 to 1945.  Though Norwegians also often cite the desire to keep their rich north Atlantic fisheries free of EU competition, Norway already has a special arrangement with the European Union on fisheries and agriculture, and it’s likely that it would continue to have a special arrangement as an EU member, in the same way that the United Kingdom has opted out of both the eurozone and the Schengen area and has negotiated its own EU budget rebate.

Though Solberg herself is from Norway’s western coast, her party’s base is comprised largely of business-friendly elites in Oslo and Norway’s other urban centers, where support for EU membership runs highest.  But that enthusiasm doesn’t always flow down to voters who support Solberg, and it certainly doesn’t extend to Norway’s other right-wing parties.  Continue reading Despite the success of pro-EU parties in Norway, don’t expect EU membership anytime soon →

European Union, United Kingdom

On Europe, the real question for the UK is whether it wants separation or divorce

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This morning, Michael Geary and I argue at the Brussels-based E!Sharp for a new way to think about the United Kingdom’s relationship with the European Union.European_UnionUnited Kingdom Flag Icon

Amid all of the discussion of British prime minister David Cameron’s plan to renegotiate certain opt-outs (on immigration or justice, perhaps) from the rest of the European Union and to hold an ‘in-or-out’ referendum if he wins reelection in May 2015, the question is typically framed as ‘should Britain stay in the European Union?’

But on the basis of 40 years of British membership in the European Union, it seems clearer that the United Kingdom has already left the European Union in a meaningful sense, and even when it entered what was then the European Economic Community, it was never incredibly keen with the concept of ever closer union.

Alternatively, policymakers should concede the reality of British reluctance for more cooperation and frame the question in terms of whether the British should seek an informal separation or a formal divorce:

But as European citizens ponder the consequences of whether the British people will vote to end what’s been a dysfunctional four-decade relationship with the European Union, the question of whether Britain is going to leave the EU has become redundant — Britain, in many ways, has been leaving the Union since virtually the day it became a member.  Accordingly, the real question for British and Europe is whether the British will opt for a separation or for a divorce. We argue that separation, a detailed membership renegotiation, is the better option for both sides rather than a complete exit….

[With] British public opinion increasingly inclined to leave the European Union, it is even more important to frame the question of Britain’s relationship with Europe in realistic terms, however difficult that may be to accept.  While the terms of separation of British association with many core aspects of the European Union may be difficult for European leaders to stomach, it may be the best alternative to a more formal divorce that seems likely to happen if policymakers in London, Brussels and Berlin continue to deny the reality that British-EU relations will never be — and never have been — amorous.

 

 

European Union, United States

Goodbye WTO, hello TTIP — United States and Europe hope to create world’s largest free trade zone

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CIMG3504

Guest post by Michael J. Geary

The United States and the European Union expect to begin negotiations next month on the Transatlantic Trade and Investment Partnership (TTIP) in Washington, DC.  Their ambitious aim is to create the world’s largest trade and investment bloc that covers a combined consumer population of over 800 million people.  If the U.S.-E.U. talks prove successful, TTIP will become the biggest trade deal in history.USflagEuropean_Union

U.S. president Barack Obama announced, to mild surprise, in his February 2013 state of the union address before the U.S. Congress that the United States would begin TTIP talks with the European Union.  His announcement followed the publication of a report from the High Level Working Group, which had spent a year examining  various options for expanding transatlantic trade and investment.  The HLWG concluded that any deal between the United States and the European Union, in order to capture the most gains, would have to be comprehensive and include sensitive issues such as government procurement, a reduction in non-tariff barriers (NTBs), intellectual property rights, and employment and labour sectors.  In May, Obama nominated his close economic advisor and free trade proponent, Michael Froman, to become the next U.S. trade representative.  Froman’s selection was, therefore, an important sign that the Obama administration is serious about completing not only TTIP, but the Trans-Pacific Partnership (TPP) as quickly as possible.

The trade and investment pact features a number of ambitious goals.  At the most fundamental level, U.S. and European leaders hope to reduce the existing transatlantic tariffs and other barriers that amount to approximately 3.5%or less on a range of goods.  That will be by far the easiest element of TTIP to negotiate.  A recent report from the Bertelsmann Foundation showed that a 3.5% reduction in tariffs would increase German exports to the United States by 1.13% and increase German imports, respectively, by 1.65%.  Deeper trade liberalisation, including a reduction in NTBs would lead to even greater economic benefits in for U.S.-German trade.  That, in turn, will significantly affect traditional intra-European trade flows, such that trade between Germany and other member states will decline significantly upon the completion of a comprehensive TTIP accord. The Bertelsmann report showed that, in the long term, French exports to Germany would fall by 23%, Italian exports to Germany would decline by 30% and British exports to Germany would drop by fully 41%. Such a comprehensive transatlantic deal would therefore mark a major realignment of traditional European trading patterns, offset by access to a wider US market.  That pattern, moreover, is likewise is reflected in Bertelsmann’s assessment.  For example, exports from Ireland, Italy, Greece, Portugal, and Spain to the U.S. increase by an average of 86%, which presents a major boost to those European countries most adversely affected by the ongoing sovereign debt crisis. Aside from the potential boost to transatlantic trade, the European Commission argues that TTIP will generate close to 2 million additional jobs, half of which would be created in the United States.

Securing a comprehensive transatlantic trade agreement, however, will not be easy.   Continue reading Goodbye WTO, hello TTIP — United States and Europe hope to create world’s largest free trade zone →

Croatia, European Union

From Dublin to Dubrovnik: Reflections on 40 years of EU enlargement

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dubrovnik

Guest post by Michael J. Geary

Croatia on Monday becomes the 28th member of the European Union, marking a historical transformation for a country at the crossroads of central Europe, the Balkans and the Mediterranean.European_Unioncroatia

The second former Yugoslav country to join the European Union (following Slovenia, also a eurozone member), Croatia declared its independence in 1991, an event that led to the breakup of the union of Yugoslavia, an event that the United Nations and the European Union may have hastened in 1992 Croatia’s independence when they provided international recognition to a sovereign Croatia.  At the same time, the Croatian War of Independence broke out between Croat forces loyal to the newly independent Croatia and the Serb-controlled Yugoslav People’s Army and local Serb militia, the latter determined to prevent Croatia from breaking away. Between 1991 and 1995, when the conflict finally ended,more than 20,000 people had died and much of the country was destroyed.

Croatia, however, has marked major progress since the mid-1990s.  Successive Croatian governments have edged closer (albeit, sometimes with a gentle nudge from Brussels) to the European Union and the country formally applied for membership in February 2003.  A year later, the European Commission endorsed its application, and the European Council granted Croatia candidate status.  Enlargement negotiations proved difficult — not least because Slovenia, already an EU member state since 2004, had insisted that certain border disputes be resolved before Croatia could be accepted as a member.  The Slovenian veto stalled the negotiations for 10 months in the late 2000s before finally the two former Yugoslav nations agreed to settle border issues bilaterally.  Yet the extradition of Croatian citizens to the International Criminal Tribunal for the Former Yugoslavia proved to be a far thornier issue dominating the EU-Croatia enlargement talks.  The United Nations established the Tribunal in 1993 to deal with war crimes that took place during the Balkan conflicts of the 1990s. Croatia’s full cooperation with the Tribunal (reluctant at times) was a prerequisite for EU membership.

2013 is a year of contrasts for the EU enlargement process — arguably one its most successful policies, and one of the reasons that the European Union received the Nobel Prize for Peace last year.  Aside from Croatia’s pending membership, the European Union is set to open negotiations with Serbia and possibly sign a Stabilisation and Association Agreement with Kosovo after those two countries signed a landmark agreement in April normalizing relations between Belgrade and Pristina after almost two decades of hostilities. Continue reading From Dublin to Dubrovnik: Reflections on 40 years of EU enlargement →

European Union, Iceland

Iceland ends its short-lived quest to join the European Union

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gunnar

It should have come as no surprise to observers of Iceland, but its new center-right government has firmly closed the door to membership in the European Union anytime soon, with an announcement from Icelandic foreign minister Gunnar Bragi Sveinsson (pictured above, left) last week.Iceland Flag IconEuropean_Union

It was virtually certain that Iceland would take a step back from EU membership, given that both governing parties — the Framsóknarflokkurinn (Progressive Party) and the Sjálfstæðisflokkurinn (Independence Party) — campaigned against EU membership in Iceland’s April parliamentary elections.

Former social democratic prime minister Jóhanna Sigurðardóttir launched membership talks with the European Union in July 2009, when Iceland was still reeling from the effects of a financial crisis that bankrupted its three major banks and left Iceland in economic meltdown.  In the immediate aftermath of the September 2008 crisis, some Icelanders even seriously considered joining the euro after the Icelandic krónur tanked in value.  As Iceland’s economy has recovered to some degree, despite difficult loan burdens and continued currency controls, and as the eurozone has come to appear more like a monetary straitjacket than an economic life raft, Icelandic voters have increasingly soured on the benefits of EU membership.

Though prime minister Sigmundur Davíð Gunnlaugsson’s Progressive Party was seen as originally more open to continuing the talks, Gunnlaugsson seems to have taken aboard the more hardline views of the Independence Party — no one quite expected the government to end negotiations with such resolute finality in only its first month in office.

So while Iceland will continue to be a part of Europe, it will do so, like Norway and Switzerland, outside of a formal membership of the European Union.

As I wrote in the immediate aftermath of the election, however, the line between membership and Iceland’s current status is not as bright as you might expect: Continue reading Iceland ends its short-lived quest to join the European Union →

European Union, United States

Spying on the Europeans — PRISM repercussions as Obama heads to Europe

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stasi 2.0

Michael J. Geary and I argue in The National Interest this morning that the repercussions of reports of the PRISM program within the U.S. National Security Agency mean that U.S. president Barack Obama will face tough questions when he goes to Europe for the G8 summit in Northern Ireland and additional meetings in Berlin. USflagEuropean_Union

At a time when Europeans are already concerned about the extent of their own governments’ intrusion into their private online lives, the revelations of the voluntary cooperation of service providers like Facebook and the like in allowing U.S. surveillance of foreign communications are already being met with skepticism from top U.S. allies at a crucial and ambitious time for the Obama administration’s European agenda:

The timing of the scandal could not have come at a worse time in EU-United States relations, with both sides set to embark on negotiations for what would be a landmark free-trade compact, the Transatlantic Trade and Investment Partnership (TTIP).

Above all, German chancellor Angela Merkel is expected to seek assurances from Obama in their one-on-one meetings in Berlin.  But with Germany having this week agreed to TTIP negotiations (leaving France as the remaining obstacle), and with the eurozone crisis still not fully over, certainly the Obama-Merkel meeting should have more important business than PRISM.

Ironically, the NSA gathered more pieces of intelligence within Germany during the month of March than any other EU country.  A spokesman for Merkel, the first chancellor from the former East Germany, where memories of Stasi surveillance are still fresh, said she would raise the issue with Obama. Her justice minister Sabine Leutheusser-Schnarrenberger stressed, “the suspicion of excessive surveillance of communication is so alarming that it cannot be ignored. For that reason, openness and clarification by the US administration itself is paramount at this point. All facts must be put on the table.”

Ultimately, the Obama administration and the NSA will be less vulnerable to the wrath of European regulators than the companies participating in PRISM themselves.

But Microsoft, Google and other service providers, including Facebook, YouTube, Apple and AOL, could face even more blowback than the U.S. government or the Obama administration. Their apparently voluntary participation in U.S. government’s PRISM program could open them to European lawsuits or otherwise subject them to additional regulatory scrutiny. Significant elements of their businesses are already subject to restrictions within Europe—Google faces strict restrictions on its StreetView program and Facebook’s facial-recognition capability is banned altogether. As PRISM continues to dominate world headlines, Facebook on Wednesday opened its first servers outside of the United States in northern Sweden—its presence there, which like much of Scandinavia is a bastion of government transparency and personal freedom, will come increasingly under the thumb of EU regulators.

I argued yesterday that Sweden is unlikely to come to the rescue anytime soon with respect to Facebook and PRISM.  More likely is that the European Parliament will work to pass the new data protection directive that it’s been considering for the past two years and that would place additional restrictions on the processing of personal data, though time is quickly running short with European elections set for May 2014.

Photo above is a popular graffiti slogan in Germany, showing former interior minister (and now finance minister) Wolfgang Schäuble — critics claimed Schäuble’s focus on counterterrorism measures approached levels of civil liberties intrusion similar to the East German secret police and intelligence force, the Stasi.

European Union, Sweden, United States

Can Sweden save the European Union from the NSA spooks?

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facebook goes arctic

Even as the media continues to debate leaks revealing the secret surveillance program of the U.S. National Security Agency, code-named ‘PRISM,’ one of the chief private-sector actors in the PRISM scandal opened its first non-U.S. site on Wednesday, giving one European nation a key jurisdictional hook to regulate future data privacy.USflagEuropean_UnionSweden

According to news reports from The Guardian, Facebook, has been cooperating voluntarily with the NSA’s PRISM program since summer 2009, thereby exposing the private data of both U.S. and non-U.S. citizens alike to the purview of the NSA under the authority of the U.S. PATRIOT Act passed in the aftermath of the 2001 al Qaeda terrorist attacks on New York and Washington.

But Facebook also opened a new facility to host its servers in far northern Sweden on Wednesday (in part to use the chilly Arctic weather to more efficiently cool its European servers).  Despite the awkward timing, it is Facebook’s first server hall outside of the United States, and its opening comes when European Union leaders are pushing for answers on the extent to which NSA has been permitted access to private, personal data by Facebook, Google, YouTube, Apple, AOL and other service providers and while the European Parliament is considering a new data protection directive that would enhance protection of the personal data of EU citizens.  Assuming that the European Union cannot stop U.S. government agencies, it means that European regulators could target U.S. technology companies in greater measure — after all, the EU already places restrictions on Google’s StreetView program and has already banned the European use of Facebook’s face recognition software.

So does that give Sweden a unique opportunity to ensure that the private data of EU citizens is not caught up in the NSA snare?

After all, Sweden is virtually synonymous with good government, right?

According to Transparency International, it’s among the least corrupt countries is the world.  In the middle of the 18th century, Sweden essentially invented the concept of freedom of information with the Freedom of the Press Act of 1766, and its leaders over the past two decades championed a EU-wide freedom of information regime.

But a reputation for transparency doesn’t necessarily connote a reputation for protecting privacy.  Wikileaks founder Julian Assange was so worried that Swedish authorities would extradite him to the United States that he chose to hunker down in Ecuador’s London embassy instead of allowing British authorities to transfer him to Sweden for a trial on a sexual harassment charge.  Swedes have also raised concerns with EU policymakers that the push for more robust data protection could actually harm government transparency by limiting the Swedish government’s ability to provide open access to documents.

Moreover, the current center-right coalition headed by prime minister Fredrik Reinfeldt of the Moderata samlingspartiet (Moderate Party) has introduced greater levels of Swedish surveillance.  In 2009, it narrowly passed legislation that would allow the government’s Försvarets radioanstalt (the National Defence Radio Establishment) to wiretap and access all international telephone and internet traffic, even if all  ultimate parties in the traffic are Swedish.  Though the legislation, know as the ‘FRA law’ passed only narrowly by Sweden’s parliament, the law had its genesis in the prior center-left government of the Sveriges socialdemokratiska arbetareparti (Swedish Social Democratic Workers Party).  It essentially codified into Swedish national law much of what PRISM has been purported to do within the United States.

The law caused some amount of concern, especially in neighboring Finland because all of its Internet and phone traffic at the time routed through Sweden.

Sweden’s foreign minister Karl Bildt earlier this week protested that Swedish activities under the FRA law are not similar to what’s been reported PRISM, in part on the basis that the FRA law was debated publicly and enacted by a duly elected parliament.  In that regard, Bildt’s right — it was clear just what was at stake when the Swedish parliament adopted the FRA law; in contrast, Facebook wasn’t even developed until three years after the U.S. PATRIOT Act.  In addition, Bildt expressed a healthy hint of suspicion about other ‘certain states,’ presumably including the United States:

 

Continue reading Can Sweden save the European Union from the NSA spooks? →

Bulgaria, Cyprus, European Union, France, Germany, Greece, Italy, Spain, United Kingdom

What Iceland’s election tells us about post-crisis European politics

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dusseldorf

Iceland was supposed to be different.Iceland Flag IconEuropean_Union

In allowing its banks to fail, neo-Keynesian economists have argued, Iceland avoided the fate of Ireland, which nationalized its banks and now faces a future with a very large public debt.  By devaluing its currency, the krónur, Iceland avoided the fate of countries like Estonia and others in southern Europe trapped in the eurozone and a one-size-fits all monetary policy, allowing for a rapid return to economic growth and rapidly falling unemployment.  Neoclassical economists counter that Iceland’s currency controls mean that it’s still essentially shut out from foreign investment, and the accompanying inflation has eroded many of the gains of Iceland’s return to GDP growth and, besides, Iceland’s households are still struggling under mortgage and other debt instruments that are linked to inflation or denominated in foreign currencies.

But Iceland’s weekend parliamentary election shows that both schools of economic thought are right.

Elections are rarely won on the slogan, ‘it could have been worse.’ Just ask U.S. president Barack Obama, whose efforts to implement $800 billion in stimulus programs in his first term in office went barely mentioned in his 2012 reelection campaign.

Iceland, as it turns out, is hardly so different at all — and it’s now virtually a case study in an electoral pattern that’s become increasingly pronounced in Europe that began when the 2008 global financial crisis took hold, through the 2010 sovereign debt crisis in the eurozone and through the current European-wide recession that’s seen unemployment rise to the sharpest levels in decades.

Call it the European three-step.

In the first step, a center-right government, like the one led by Sjálfstæðisflokkurinn (Independence Party) in Iceland in 2008, took the blame for the initial crisis.

In the second step, a center-left government, like the one led by Jóhanna Sigurðardóttir and the Samfylkingin (Social Democratic Alliance) in Iceland, replaced it, only to find that it would be forced to implement harsh austerity measures, including budget cuts, tax increases and, in Iceland’s case, even more extreme measures, such as currency controls and inflation-inducing devaluations.  That leads to further voter disenchantment, now with the center-left.

The third step is the return of the initial center-right party (or parties) to power, as the Independence Party and their traditional allies, the Framsóknarflokkurinn (Progressive Party) will do following Iceland’s latest election, at the expense of the more newly discredited center-left.  In addition, with both the mainstream center-left and center-right now associated with economic pain, there’s increasing support for new parties, some of them merely protest vehicles and others sometimes more radical, on both the left and the right.  In Iceland, that means that two new parties, Björt framtíð (Bright Future) and the Píratar (Pirate Party of Iceland) will now hold one-seventh of the seats in Iceland’s Alþingi.

This is essentially what happened last year in Greece, too.  Greece Flag IconIn the first step, Kostas Karamanlis and the center-right New Democracy (Νέα Δημοκρατία) initially took the blame for the initial financial crisis.  In the second step, George Papandreou and the center-left PASOK (Panhellenic Socialist Movement – Πανελλήνιο Σοσιαλιστικό Κίνημα) overwhelming won the October 2009 elections, only to find itself forced to accept a bailout deal with the European Commission, the European Central Bank and the International Monetary Fund.  In the third step, after two grueling rounds of election, Antonis Samaras and New Democracy returned to power in June 2012.

By that time, however, PASOK was so compromised that it was essentially forced into a minor subsidiary role supporting Samaras’s center-right, pro-bailout government.  A more radical leftist force, SYRIZA (the Coalition of the Radical Left — Συνασπισμός Ριζοσπαστικής Αριστεράς), led by the young, charismatic Alexis Tsipras, now vies for the lead routinely in polls, and on the far right, the noxious neo-nazi Golden Dawn (Χρυσή Αυγή) now attracts a small, but significant enough portion of the Greek electorate to put it in third place.

The process seems well under way in other countries, too.  In France, for examFrance Flag Iconple, center-right president Nicolas Sarkozy lost reelection in May 2012 amid great hopes for the incoming Parti socialiste (PS, Socialist Party) administration of François Hollande, but his popularity is sinking to ever lower levels as France trudges through its own austerity, and polls show Sarkozy would now lead Hollande if another presidential election were held today.

It’s not just right-left-right, though. The European three-step comes in a different flavor, too: left-right-left, and you can spot the trend in country after country across Europe — richer and poorer, western and eastern, northern and southern. Continue reading What Iceland’s election tells us about post-crisis European politics →

European Union, Iceland

Iceland’s election spells the end for its EU accession hopes

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(110) Tides pushes out at Vik

With capital controls still in place, a massively devalued krónur and galloping inflation, Iceland’s economy is not back to normal.European_Union Iceland Flag Icon

But it’s enough back to normal so that the window for Iceland’s accession to the European Union — or even, as was assumed during the worst days of its 2008 banking crisis, accession to the eurozone — is now very unlikely to happen.

Regardless of whether Sigmundur Davíð Gunnlaugsson and the Framsóknarflokkurinn (Progressive Party) or Bjarni Benediktsson and the Sjálfstæðisflokkurinn (Independence Party) come out on top in Saturday’s election, they are likely to form a center-right coalition that will look to reverse many of the initiatives of the social democratic / leftist government of Jóhanna Sigurðardóttir over the past four years.

Above all, none of the Sigurðardóttir government’s priorities is more endangered than the project of Iceland’s EU accession.  Most news stories note that both a Progressive-led or Independence-led government would slow accession talks, but it seems likelier that Iceland’s next government would essentially end the talks indefinitely — they might not formally withdraw Iceland’s EU application, but they certainly won’t take any action to further discussions.

While Gunnlaugsson has called for a referendum on the eventual result of talks, his party  virtually alone among Iceland’s parties argues that the country should not reimburse the British, Dutch and other governments who reimbursed non-Icelandic depositors who put their savings in Icesave prior to its collapse in 2008.  Benediktsson is hardly any more pro-Europe — he’s argued that Iceland should break off talks altogether and focus on deeper global ties, such as Iceland’s recent free trade agreement with the People’s Republic of China — the first such free trade pact between a Chinese and a European country, likely due to Chinese eagerness to enhance its role in the Arctic north.

If for some reason a Progressive/Independence government does complete the accession talks, the result would be put to a referendum of Icelandic voters who remain highly skeptical of Brussels’s pernicious influence.

Sigurðardóttir’s government formally applied for membership in July 2009 and negotiations began a year later, but with her party likely to return to opposition, the window for Iceland’s EU membership seems likely to end with her government, as Alda Sigmundsdóttir writes today in The Guardian:

So, what makes the Progressive party so popular?

They are vehemently opposed to joining the European Union…. Indeed, many of the Progressives’ policies and declarations lean precipitously towards a new nationalism, with mildly xenophobic stances on issues such as immigration and asylum seekers, and party symbols that are vaguely reminiscent of fascism. The Progressive party was also the party that was most fiercely opposed to Iceland repaying the UK and Holland for the failure of the Icesave online bank.

If [Gunnlaugsson] wins, it will be because Icelanders fear abuse and exploitation by outside forces more than they do a return to the corrupt days of old.

Those are some fairly strong accusations, but I have to wonder if Icelandic voters aren’t simply being rational with respect to EU accession — they already have the benefits of free movement of goods and free borders with Europe, as well as much of the legal harmonization that typically comes with membership and a robust economic relationship with Europe that developed without Icelandic membership.  Why formalize the deal when they already have so many of the benefits of membership without any potential for considerable drawbacks that could harm Iceland’s cherished (and highly protected) fishing industry or the fierce national pride of a uniquely compelling nation that won its own independence from Denmark in 1944? Continue reading Iceland’s election spells the end for its EU accession hopes →

European Union

Regling denies north-south European divide, claims EFSM a ‘lot of solidarity’

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olli

If you were at Brookings Thursday afternoon, you could have taken away the following points:European_Union

  • Olli Rehn (pictured above), European commissioner for economic and monetary affairs and vice president of the European Commission, thinks the eurozone will return to growth by the end of 2013.
  • Klaus Regling, chief executive officer of the European Financial Stability Facility thinks there is no north-south divide in the eurozone.
  • The three-step plan presented by Jeroen Dijsselbloem, president of the Eurogroup of eurozone finance ministers, for future growth comes down to: balanced budgets, banking union and structural reform.  And, by the way, he thinks the main political problem in the eurozone is that European Union leaders have been so busy (for the past four years) dealing with the crisis that they haven’t had time to explain adequately their plans to the public.

jeroen

Consider this quote from Dijsselbloem (pictured above), whereby he says he and his colleagues have been so busy that they haven’t done a job of explaining themselves to the public:

‘[We’ve been so busy] solving the problems and dealing with the crisis, that we’ve not really involved a lot of people, the public, at large, as to what we’re doing, why we’re doing this, why it’s so crucial to work together along the lines of the strategy, why it’s so crucial to push forward structural reforms,” Dijsselbloem said.  ‘People are just experiencing the structural reforms in terms of, ‘I’m losing social rights,’ but we have to explain to them in order for young people to be able to participate also in labor markets, we have to rebalance maybe some countries’ securities and flexibilities in order to create new jobs.’

That’s a fairly audacious understatement of the democratic deficit problem in the European Union these days, and especially among the eurozone member states, who have had treaty upon treaty, condition upon condition dictated to them by Brussels and Berlin.

It also took two questions from the audience about deposit insurance for Dijsselbloem to confirm that their intention is for banking union reform to incorporate a eurozone-wide deposit insurance — in the fullness of time, of course.

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Regling (pictured above), one of five northern Europeans sitting on the panel today, went so far as to rebuke Jean Pisani-Ferry, a French economist and director of Bruegel, a Brussels-based think tank, for suggesting that the political risks in the European Union are rising.

The director general of [the European commissioner of economic and monetary affairs] is Italian, I have two deputies, one is French and one is Spanish, so in the end we’re all good Europeans,’ Regling said, after calling Pisani-Ferry’s question cheap.  ‘We are also not saying that Southern Europe has no problems — you implied that, I think that’s just wrong. We are fully aware there’s a lot of solidarity coming from European partners to these countries.  My institutions alone have dispersed in two years alone €185 billion, in two years alone… That’s a lot of solidarity.  These countries go through very painful adjustments, nobody here is denying that, although we’re all northern Europeans.  But I don’t like this north-south [dichotomy].  I’ve said this before, Latvia was the first country to take [tough structural adjustments] and that’s pretty northern European, so I think we should all be a bit more rational here.’

Reasonable economists can disagree about the policy mechanisms available to Greece or Italy or Portugal or Spain or Cyprus to pull their economies out of depression and how to repair the eurozone’s growing pains.  I’m not going to argue that Italy is in no more dire need of labor market reform than, say Sweden or The Netherlands — of course, Italy needs to modernize its economy if it wants to goose its long-term GDP growth potential.  Greeks have had to learn that income tax isn’t an optional exercise.  And Germany needs to figure out a viable trade model where the eurozone doesn’t exist, as it seemed in its first decade, as a means of enabling the European periphery to buy all of Germany’s exports.

But to refuse to see that there’s a north-south divide in Europe, that Mediterranean Europe is not at the center of today’s eurozone crisis, is abjectly short-sighted.  Regling has to realize that even the north-south divide in Germany is stronger than the east-west divide, despite the separation of west from east for nearly three decades!

It’s Italy that’s currently undergoing a crisis of government today, not France.  It’s Golden Dawn in Greece winning their highest percentage of votes in the history of post-dictatorship Greece, it’s not a neo-Nazi resurgence in Germany.  It’s Cypriot depositors who spent a week wondering if their five-figure savings would be taxed by 6.75%, not the Irish or the Latvians.  That’s not to deny that Latvia and Estonia and Ireland have made incredibly tough decisions in the past four years, but none of those economies are even as big as Greece, let alone Spain or Italy.

If eurocrats like Regling have such a hard time at Brookings, who are largely sympathetic to the goal of (if not always the precise strategies for) saving the eurozone, good luck dealing with Alexis Tsipras’s radical left Greek government or the next Silvio Berlusconi government in Italy or Artur Mas’s declaration of Catalan independence — all of which could happen by the end of 2014.

Photo credit to Kevin Lees — Brookings Institution, Washington DC, April 2013. 

Cyprus, European Union

Cypriot-‘troika’ deal means that Cyprus is leaving eurozone in all but name

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Another late Sunday night in Brussels, another eurozone bailout plan for Cyprus — and it seems likely that the new deal between Cyprus president Nicos Anastasiades, and the ‘troika’ of the European Commission, the European Central Bank and the International Monetary Fund will endure much longer than last week’s disastrous plan, though capital controls to be implemented by the Republic of Cyprus’s government seem likely to lead to a backdoor eurozone exit for the nation of 1.15 million people.
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The Cypriot-troika deal in brief

The deal will shield depositors with under €100,000 in savings from a ‘haircut’ levy, but depositors with funds over €100,000 now face an even more painful result –what amounts to a haircut for depositors and creditors alike at the troubled Bank of Cyprus (the largest Cypriot bank), and an even deeper haircut for Laiki’s depositors and creditors, who will take huge losses as Laiki is wound down.  Laiki (also known as the Cyprus Popular Bank, the country’s second-largest bank) will be split into a ‘bad bank’ and a ‘good bank,’ the latter to be folded into the Bank of Cyprus.

All creditors at the Bank of Cyprus will see their interests restructured into a long-term equity interest and uninsured depositors will take an expected haircut of around 35% or 40%, with their deposits also held up for some time to come.

All the same, as Joseph Cotterill at FT Alphaville writes, the deal is better on two counts:

But there were two major injustices in the first Cyprus-Troika deal which made a mockery of the bail-in principle. Without debate, and upfront, it “taxed” depositors below the insured €100k limit alongside the uninsured. Then the tax was applied to either irrespective of bank. Why should small depositors in Barclays Nicosia or VTB Limassol take pain off large ones in Laiki or BoC, for instance. Well, finally, now we know. They shouldn’t have. The two unjust parts are gone.

Bonus points, I guess (if you’re a eurocrat), for structuring the deal in such a way that it can be implemented directly under Cyprus’s banking authority, so no need for another vote from the Cypriot parliament, which overwhelmingly rejected last week’s plan.  That plan featured a 6.75% levy on all depositors with savings under €100,000 in any Cypriot bank.  The parliamentary run-around, however, will only fuel the ‘democratic deficit’ hand-wringers throughout the European Union and breed resentment inside Cyprus and beyond.

The worst of the Irish and Icelandic precedents

Though the deal is ostensibly narrowed to focus on Cyprus’s two largest banks, and it’s better than last week’s plan, the deal essentially features the worst elements of the Irish and Icelandic examples.

Like Iceland, some of the Cypriot banking sector will be allowed to fail — Laiki’s uninsured depositors are out of luck, no matter whether they are Russian or Cypriot or whatever.  That’s exactly how Iceland approached its banking sector failure.

But unlike Iceland, Cyprus does not control its own monetary policy, so it won’t be able to devalue its currency and take the kind of independent monetary policy steps to rebalance its economy in the way that Iceland has.  Though Iceland is no longer the financial center it was before 2008, it has returned to GDP growth (around 3% in 2011 and 2.5% in 2012) and features relatively low unemployment — just 5.3% as of November 2012.  In contrast, Cyprus remains trapped in the ECB monetary policy straitjacket.

But like Ireland, the rest of the Cypriot banking sector will be essentially nationalized by the Cypriot government, with a European bailout that is likely to require additional bailout assistance and will come with increasingly stringent austerity measures that Cyprus’s government will be forced to take that will invariably depress its own GDP growth.  No one’s optimistic about Cyprus — it seems fated to suffer a fierce GDP contraction and a massive uptick in unemployment, joining Greece and Spain as one of the eurozone’s most troubled economies, no thanks to the Eurogroup’s clumsy policymaking.

Self-inflicted wounds to the European project

It’s worth repeating that the damage from the first Cyprus plan remains and cannot easily be reversed — Cyprus’s banking sector has now been decimated, probably permanently.  As one unsentimental Moscow economist put it, Cyprus’s beaches-and-banks economy is now just beaches.  The best hope for Cyprus’s economy is the rapid development of natural gas deposits that could bost its economy back after what will likely be a double-digit recession. But the ultimate scope and richness of those deposits are still unknown, and there’s no assurance that natural gas will be the country’s economic savior.

Brussels has so thoroughly undermined Anastasiades that he allegedly threatened to resign Sunday at one point, so it’s not clear how much legitimacy he’ll have in the next four years and 49 weeks of his five-year term, especially given that his own center-right party Democratic Rally (DISY, Δημοκρατικός Συναγερμός or Dimokratikós Sinayermós) controls just 20 of the 56 seats in the Cypriot House of Representatives (Βουλή των Αντιπροσώπων).

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In addition to the obvious ammunition that eurozone leaders have handed to euroskeptics, no one in Spain or Italy or Slovakia or Latvia should be feeling very good these days about keeping their money in national banks, deposit insurance or not.  Already today, Jeroen Dijsselbloem, the newly elected president of the Eurogroup of eurozone finance ministers (pictured above with IMF managing director Christine Lagarde), has released a statement walking back earlier comments that appeared to hail the Cypriot bailout as a precedent for future deals.

It’s been a horrible start for Dijsselbloem, who succeeded Luxembourg prime minister Jean-Claude Juncker — Juncker has already (very gingerly) criticized the Eurogroup’s post-Juncker approach to Cyprus, and it’s hard to believe that Juncker would have made some of the more glaring errors that  Dijsselbloem has made — unlike Juncker, who was Luxembourg’s finance minister from 1989 to 2009 and has been prime minister since 1995, Dijsselbloem has served as the Dutch finance minister for barely over four months. It’s starting to look like the decision to appoint Dijsselbloem as a sort of compromise Eurogroup president (he’s a pro-growth member of the Dutch Labor Party who’s implementing an austerity regime in an otherwise budget-cutting government led by center-right prime minister Mark Rutte) may have been a poor one.

Capital controls are a backdoor Cypriot eurozone exit 

While it’s far from an original observation — more sophisticated financial commentators and economists have made the same point — the biggest takeaway from the weekend is that Cyprus has essentially been booted out of the eurozone, in large part due to the capitol controls that Cyprus looks set to enact tomorrow when banks in the country reopen — here’s a short summary of the menu of options from Yiannis Mouzakis, based on the capital control bill that Cyprus’s parliament passed over the weekend.  There’s optimism that the controls will be ‘very temporary,’ and will be somewhat lighter than originally feared, but it’s worth noting that Iceland’s controls are still in place even today, over four years after their imposition in late 2008.

The inescapable conclusion is that a ‘Cypriot euro’ is no longer the same thing as a euro throughout the rest of the eurozone.

As former banker Frances Coppola wrote over the weekend, the imposition of capital controls transforms Cyprus into something far short of an equal member of the eurozone:

Once full capital controls are imposed, a Euro in Cyprus will no longer be the same as a Euro anywhere else in the Euro area. It cannot leave the island. The Cyprus Euro will in effect be a new domestic currency. The imposition of capital controls in Cyprus is therefore the end of the single currency in its present form.  Continue reading Cypriot-‘troika’ deal means that Cyprus is leaving eurozone in all but name →

Cyprus, European Union

Cypriot parliament overwhelmingly rejects EU bailout terms, turns to Plan B

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Protesters take part in an anti-bailout rally outside the parliament in Nicosia

This was not surprising.

After a couple of delays, Cyprus’s 56-member House of Representatives (Βουλή των Αντιπροσώπων) has rejected the European Union-led bailout of Cyprus’s banks by a vote of 0 to 36, with 19 abstaining and one not present.European_Unioncyprus_world_flag

As I wrote yesterday, the parliamentary rejection became increasingly likely as the vote became delayed.

So where do things stand now?

The crisis continues to unfold in real time — although the bailout terms ( €10 billion loan to Cyprus, with an additional €5.8 billion to be raised by means of a haircut on all Cypriot depositors) were announced Friday night, Cypriot banks are now closed through at least Thursday while everyone scrambles for a Plan B.

The European Central Bank has, for now, agreed to continue ‘its commitment to provide liquidity as needed within the existing rules,’ but who know what that means?  The current crisis started over the weekend when the ECB threatened to pull that support.

Obviously, EU leaders and the International Monetary Fund will probably go back to the negotiating table with newly inaugurated Cypriot president Nicos Anastasiades to determine a new approach — the EU position now seems to be that they don’t care how Cyprus raises the €5.8 billion, so long as they raise it.  Essentially, that means some kind of rebalancing of the burden to be shared by depositors in Cyprus — that means perhaps raising the 9.9% levy on deposits over €100,000 and lowering the 6.75% levy on deposits under €100,000.

Meanwhile, there’s word that Cyprus and Russia are now in talks over, potentially, either a solution that involves Russia or Gazprom — Cypriot finance minister Michael Sarris actually flew to Moscow Tuesday, which indicates that the Cypriots and the Russians are extremely serious.

In this regard, today’s vote probably bought some crucial time to come up with a credible counter-offer from Moscow.  Russian president Vladimir Putin is, in particular, upset about the approach because around 22% of deposits in Cypriot banks are held by Russian citizens.  That, in fact, is one of the reasons why the EU was so wary of providing a full bailout to Cyprus over the weekend.  Russia has designs on future exploration of natural gas deposits in Cyprus, and it could also well have designs on a greater military presence in Cyprus as well.  All of this has profound geopolitical security implications — for the EU and Greek Cypriots, but also for Turkish Cypriots, the United States, and its NATO allies, including Turkey.

Whether Anastasiades is serious or not about the Russian alternative, it certainly gives him more negotiation leverage with the EU and the IMF, which could conceivably revert back to a full  €17 billion bailout, via the ‘troika’ or through the European Stability Mechanism, as Open Europe notes in a great post.

We’re also in such uncharted territory that if ‘EU Plan B’ or ‘Russia Plan B’ don’t work, then Plan C is pretty much a disorderly default that finds Cyprus tumbling out of the eurozone, with even greater pain for Cypriot savers, Russians depositors, and all of the holders of private and public Cypriot debt, to say nothing of the costs to the eurozone — now that EU minds from Brussels to Berlin to Helsinki have escalated the bailout into an international crisis, it could catalyze an entirely self-inflicted domino effect that would pretty rapidly bring the eurozone to 2008-crisis levels.

So let’s hope we don’t get to that, though with the United Kingdom airlifting €1 million in cash to Cyprus to cover military personnel unable to access their own funds and with Russian ultranationalist Vladimir Zhirinovsky mock-eulogizing private property in the EU, the Cypriot situation has already reached a pretty high crisis mode.

One question that I haven’t heard asked in the past 72 hours, and one I wish I had an answer: why hasn’t Moscow been involved in the Cypriot bailout talks from last June onward? It’s clear that there’s a Russian interest in an orderly bailout (or even selective default) for Cyprus and its debt-bloated banks.

Russia has already extended a €2.5 billion loan to Cyprus, and Cyprus and the EU are dependent on Russia’s rolling over than loan soon if the current EU-led bailout to have any chance of working.

Are the channels of communication between Brussels and Moscow really so poor?

All of this was predictable nine months ago.

Even if the EU ultimately blinks, it’s already done a lot of damage that it can’t well undo — it’s still the case that the EU has undermined Anastasiades just days into his administration, pretty much destroyed the short-term future of the Cypriot finance sector, undermined the concept of deposit insurance throughout the eurozone, given every euroskeptic on the continent a prime example of the anti-democratic nature of the EU project.

Above all, the Cypriot crisis has undermined global confidence in EU leaders at a time when most everyone was certain that the worst of the eurozone crisis was behind us.

The good news? No word of significant bank runs in Italy or Spain, though I’d love to see how much capital quietly leaves those two countries electronically in the two weeks following March 15.

Photo credit to Yorgos Karahalis of Reuters.

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A comparison of US and EU freedom of information regimes

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For what it’s worth, I’ve been reviewing a law review article that I wrote in 2006 comparing, on the one hand, the U.S. Freedom of Information Act and, on the other hand, E.U. Regulation 1049/2001.European_UnionUSflag

The paper,  Ever Closer Transparency: Comparing the European Regulation on Public Access to Documents with the U.S. Freedom of Information Act, tries to accomplish three tasks: (i) establishing the theoretical context for freedom of information and the policy rationales underlying it, (ii) explicates the text of FOIA (5 U.S.C. §552), as adopted in 1966 and amended in 1974 in the United States, and Regulation 1049/2001, as adopted in the European Union in 2001, elucidating their similarities and differences, and (iii) providing five recommendations to strengthen the freedom-of-information regimes in each country.

Given that I spent the next part of the year taking the New York bar exam and jumping into a fund formation legal practice at Latham & Watkins, I never followed up with actually publishing the article, so I’m considering revising the paper and submitting it.

Any comments or recommendations on the original text (see in Scribd below — the link is here) are very much welcomed!

Cyprus, European Union

What comes next for Cyprus and the EU following Friday’s haircut ‘bail-in’?

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nicenic

So much for ‘nice Nic’ — it’s not that he’s reverted back to ‘nasty Nic’ so much as ‘nonessential Nic.’European_Unioncyprus_world_flag

Fifteen days after his inauguration as Cyprus’s new president, Nicos Anastasiades (pictured above, bottom), was forced into what’s now become a growing domestic, eurozone and international crisis when European Union and International Monetary Fund leaders presented Anastasiades with a €10 billion bailout package.

The catch, of which you’re almost certainly aware at this point, is that an additional €5.8 billion of savings will come in the form of a one-time levy on all bank accounts in Cyprus — deposits of  €100,000 will pay a 9.9% levy and deposits of under €100,000 will pay a 6.75% levy, even those deposits are insured by a system similar to the FDIC guarantee in the United States.  Senior bondholders won’t take a haircut.

So if you’re a hedge fund, for now at least, you’ll receive fully 100% of the face value of any debt you hold in Cypriot banks.  If you’re, say, a widowed Cypriot pensioner with €30,000 saved in a Cypriot bank, you’ll wake up Tuesday morning to find that you now have just €27,975.

It’s impossible to overstate just how politically explosive the plan was — in one fell swoop, Europe’s leaders have single-handedly done all of the following:

  • undermined the Cypriot presidential administration just days after it was elected with the support of those same European leaders and a promise by Anastasiades that any bailout would not include deposit haircuts;
  • provided ammunition to every euroskeptic in Europe from Beppe Grillo in Italy to Nigel Farage in the United Kingdom by reinforcing the notion that European institutions suffer from a lack of democratic legitimacy and gratuitously trample national sovereignty;
  • pulled the rug out from under the financial industry in Cyprus, essentially the only growing sector in the Cypriot economy;
  • handed to Cyprus’s parliament — where Anastasiades’s center-right Democratic Rally (DISY, Δημοκρατικός Συναγερμός or Dimokratikós Sinayermós), controls just 20 out of 56 seats — a strong reason to vote against the deal, thereby exacerbating the uncertainty throughout the week;
  • undermined the concept of deposit insurance throughout the entire eurozone;
  • by Europeanizing — or even internationalizing — what should have been a small matter in a country with a GDP ten times smaller than Greece’s, potentially initiated bank runs in Italy, Spain, and who knows where else throughout Europe;
  • needlessly antagonized Russia in the process, and may have provoked Russia into making a politically explosive counter-offer to Cyprus; and
  • probably did nothing to help Cyprus’s long-term economic outlook, because if the levy weren’t enough to depress Cypriot growth and undermine its banking industry, further austerity designed to reduce Cyprus’s public debt is certain to send Cyprus’s GDP swooning for some time to come.

That’s right — the first major decision of the Eurogroup of eurozone finance ministers since choosing as its president Jeroen Dijsselbloem, a center-left finance minister newly elected in the Netherlands just last autumn, is to demand an increase in the Cypriot corporate tax rate from 10% to 12.5% and a further increase on Cyprus’s savings tax.

That’s in addition to the deposit haircut that everyone’s mostly focused upon.

Anastasiades seems to have had very little option but to accept the deal, despite the fact that European leaders, including German chancellor Angela Merkel, actively supported his presidential bid in last month’s election:

[Anastasiades] spoke on Saturday of a ready-made decision imposed on Nicosia in the form of a blackmail: Take it or have the eurozone crumble….

In a written statement he issued on Saturday afternoon, Anastasiades said “Cyprus came across a previously made decision, a fait accompli.” In his defense he said that the emergency situation “did not arise in the last 15 days that we have undertaken the country’s administration.”

In the February 24 presidential runoff, Anastasiades won a landslide victory, with 57.48% of the vote to just 42.52% for health minister Stavros Malas, the candidate of the socialist Progressive Party of Working People (AKEL, Aνορθωτικό Κόμμα Εργαζόμενου Λαού or Anorthotikó Kómma Ergazómenou Laoú).  

Anastasiades, in an address to the nation Sunday night, meekly argued that depositors would nonetheless receive bank shares in return for the one-time assessment and remained optimistic that recently discovered natural gas deposits in Cyprus might well boost Cyprus’s banks in the near future.

ATM Cyprus

The political fallout for Cyprus 

To the extent domestic politics is to blame for the current Cypriot crisis, AKEL is far from blameless — it’s unclear whether Cypriots will fault Anastasiades less than half a month into his administration more than his predecessor, Demetris Christofias, the country’s president from 2008 until last month.

Christofias and European leaders opened talks in June 2012 to secure a bailout, and Christofias even began to implement some small reforms, including a 5% VAT on food and drugs and an increase in the bank levy and tobacco taxes, but fell far short of European demands to reform public employment, the public pension system, and privatization of state-run industries in a country where unemployment has now risen to 14.7%.

In addition, the bailout talks were particular complex for other factors, including the outsized amount of the Cypriot banking sector’s debt, tied in large part to the Greek debt crisis.  In addition, many Russian oligarchs have deposited money in Cyprus’s banks, and Cyprus has been scolded in the past for the facilitation of money laundering from less-than-pristine Russian sources.

With Merkel up for reelection in September, it would have hardly been palatable for her to push through a German-funded bailout of dodgy Russian depositors, which was apparent enough in the latest round:

Merkel’s Finance Minister Wolfgang Schäuble had gone to Brussels with a firm mandate from Berlin: “no bail-in, no bailout”, said a member of her government. That meant: unless depositors took a hit, there would be no agreement and Germany would not contribute towards a package for Cyprus.

So talks never quite progressed, and with Cyprus facing imminent sovereign default, Anastasiades came rather easily to office with a plan to renew those talks, though he repeatedly refused to accept a deposit haircut of the kind now being implemented.

Although today was a bank holiday in Cyprus, banks were initially set to close on Tuesday, but will now be closed until Thursday as well, as the Cypriot parliament has repeatedly delayed taking up debate on the Cypriot package.

Anastasiades’s DISY, as noted above, controls just 20 out of 56 elected seats in the Cypriot House of Representatives (Βουλή των Αντιπροσώπων) and AKEL controls 19.  The centrist Democratic Party (DIKO, Δημοκρατικό Κόμμα or Dimokratikó Kómma), which backed Anastasiades in the presidential race, controls another nine seats.  Three additional parties that largely supported the center-left, independent Giorgos Lillikas in the presidential election control an addition eight seats, including five by the Movement for Social Democracy (EDEK, Κίνημα Σοσιαλδημοκρατών or Kinima Sosialdimokraton).

That means that if AKEL, EDEK and other small parties oppose the deal, DISY and DIKO hold just of 29 votes, just enough to pass the Cypriot package without any defections.

Moreover, DIKO’s leader has already called for changes to the bailout legislation, and it looks increasingly like Anastasiades lacks the support to win a vote in parliament, which means that European leaders will have to renegotiate the previous deal.  It’s not clear how much time Cyprus has before its banks (or its government) become insolvent.

Cold War redux?

Meanwhile, Russian president Vladimir Putin denounced the decision as ‘unfair, unprofessional and dangerous.’

Russia hasn’t indicated whether it will extend or otherwise change the terms of an existing €2.5 billion loan to Cyprus — if Russia refuses to extend the loan for another five years, the Cypriot bailout will need to be even larger.  So there’s that.

I wouldn’t be surprised if Anastasiades and members of the Russian government are discussing an alternative to the current European-IMF plan — the Republic of Cyprus, which occupies the southern half of the island of Cyprus, is not a member of the North Atlantic Treaty Organization, and a €17 billion bailout would be a small price for Russia to pay in exchange for closer military ties or a Russian naval base on the island.

Perhaps even more tantalizing for Russia, and its state-owned natural gas company Gazprom, are newly discovered natural gas deposits that Cyprus hopes will fuel future economic growth.  Indeed, there are already vague reports of a Russian counteroffer — the official Russian news agency seems to indicate that emergency talks have now been initiated:

Russia’s Gazprom has not offered the Republic of Cyprus financial assistance in restructuring the country’s banks in exchange for the right to gas production in the exclusive economic zone of Cyprus. Gazprombank initiated this offer, a spokesman for the gas giant told Tass.

That result would cause dismay among the United States and its European and NATO allies which, by the way, includes Turkey.  Turkey has occupied the northern half of the island of Cyprus since the 1970s — the Turkish Republic of Northern Cyprus declared its independence from the Greek Cypriot republic to the south in 1983, and the two have remained divided ever since.  So what’s an economic crisis and a domestic political crisis could also become a geopolitical security crisis soon enough.

The economic and political fallout for the eurozone

Reaction from economic commentators has been essentially universally negative since news broke early last weekend. Continue reading What comes next for Cyprus and the EU following Friday’s haircut ‘bail-in’? →