Now that the crisis in Cyprus has been temporarily resolved, the unspoken question is: Who’s next?
Perhaps Malta, which has an even bigger banking sector than Cyprus relative to G.D.P., much of it highly reliant on offshore depositors. Or maybe Latvia, fast becoming the destination of choice for Russian funds flowing out of Cyprus and now on course to join the euro zone.
Even Spain or Italy could be vulnerable to a similar bailout, now that the Dutch finance minister, Jeroen Dijsselbloem, who is president of the Euro Group of finance ministers, has hinted that Cyprus could provide a model for the resolution of future banking crises.
And while euro zone leaders eventually backed down from targeting depositors with less than €100,000, a dangerous precedent has been set. The rights spelled out in the European Union’s deposit guarantee laws should never have been put into doubt, and the specter of future runs on banks looms large across the periphery of the euro zone.
The inconvenient truth for euro zone leaders is that we will never emerge from this state of crisis until a fully functioning banking union is put into place. For this to work, there must be a European banking resolution mechanism to recapitalize banks and provide a backstop for a euro-zone-wide deposit guarantee scheme.
Such a mechanism should be funded by the banks, with contributions relative to their risk profile, rather than taxpayers or depositors. Without such a common fund, investors and depositors will have little trust in the euro zone’s banking system, and the risk of bank runs in countries with vulnerable financial systems will remain.
As economists have been stressing for years, there must also be a solution to the high interest rates being paid by the countries of the south. We cannot continue to ask for severe structural adjustments in these countries when billions of euros each year are spent on interest payments rather than investing in economic growth.
Chancellor Angela Merkel must not keep pretending to her electorate in Germany that the euro is going to survive when such high interest rates still need to be paid. To this end, the euro zone’s core members must accept that a partial mutualization of existing debt is essential in order to allow countries on the periphery to benefit from lower interest rates. This concerns not just Italy and Spain; Slovenia is also a victim. While broadly respecting the stability pact, Slovenia is faced with a lack of liquidity due to its small bond market and interest rates of nearly 5.7 percent.
Euro zone leaders cannot continue to pursue the same approach, based on last-minute, short-sighted deals, agreed behind closed doors at arduous all-nighter summit meetings. The Cyprus deal struck two weeks ago was typically absurd, with the European Central Bank and the German and Cypriot governments all blaming one another for the disastrous decision to target small depositors. It was also no secret that the Cypriot banking sector, flooded with Greek bonds, faced an impending crisis following the 2012 haircut of Greece’s sovereign debt. Yet the situation was allowed to fester, with one catastrophe temporarily averted while another lurked just around the corner. This has got to end.
The intergovernmental method, focused always on how to win the next election rather than how to avoid the next crisis, must be replaced by a strong and accountable form of economic governance at the European level. We are no longer simply facing a debt crisis, concerned only with market confidence or the views of credit rating agencies. At stake is the trust of ordinary E.U. citizens in the European project as a whole. Unless steps are taken to restore this trust, we risk seeing the disintegration of the euro zone and the European Union as we know it.
Guy Verhoftstadt, a former prime minister of Belgium, is the leader of the Liberal Group in the European Parliament.