The Cyprus bank raid

Finally, Russia has become a player in the Euro drama. Why Moscow remained discreet about the Greek meltdown remains obscure. What is less obscure is the huge deposits Cyprus-based banks have taken from the Russian wealthy. So at first glance, the troika’s suggestion that the deposit guarantee of up to € 100k be suspended, looks like a moral statement in the form of a swipe at money laundering.

The morality of the action of course betrays its source. The policy did not emerge from the brow of the troika-IMF, ECB and Commission- but from the Social Democrat brothers and sisters in the Bundestag, who threatened to withdraw support from the Merkel coalition over fiscal policy, if depositors in Cyprus banks did not take a haircut. Getting at money launderers justified to the German legislature the suspension of law.

It is notable that Pierre Muscovici, the French Finance Minister, has categorically criticized the measure as infringing the rule of law, let alone the internal market. The irony is that those who want  Europe to “reflate”, à la Paul Krugman, were hoping that the Social Democrats and the Greens together would reject the Merkel coalition’s austerity policy, and concede to French and Club Med demands for a mutualisation of risk, and transfers. Transfers are in effect being made on a daily bases under the ECB Target 2 mechanism. The result is that the Bundesbank as a member of the ECB is racking up ever mounting liabilities to the southern countries.

This incident reveals how deep the differences are between the northern and southern  Euro-member states. As Gideon Rachman has pointed out in the FT (Europe’s leaders run out of credit in Cyprus:, the gap between northern and southern members cannot just be measured in productivity, savings and trade, but also in political culture. The northern countries, he rightly suggests, have little trust in the southern countries’ abilities to deliver on commitments.

But it is one thing to be distrustful and it is another for Germany to take the law into its own hands, and scrap it whenever the mood dictates. It may well be that Pierre Muscovici will be able to turn the tables on Germany in EU counsels over this behaviour. Time will tell. But it is equally possible to interpret this action by the German Bundestag as a further step to Machtpolitik, whereby “we are right” becomes the law.

As I have commented elsewhere in this blog, the major factor to have emerged from this crisis is German primacy. This was not the intent of either the German government at the time of the signing of the Maastricht Treaty, nor was it the intent of France and Italy, the major promoters of the Euro. But it is what happened.

The Euro was a disaster waiting to happen. None of the key conditions relating to labour markets for an optimal currency zone were there from the start. None of the governments bothered to start implementing the reforms needed to make it possible to work. Rather, national labour markets competed against each other, while the French talked the DM up before the Euro. Germany went into the Euro with a currency 20% overvalued. Unions, business and politics coalesced to drive down unit labour costs, moderate wages, and encourage savings. Result: vast surpluses, and recycling to Club Med via French and German banks. Since 2008, the Franco-German “tandem” has stalled. There is no agreement, other than smiles, between Paris and Berlin. Berlin says NEIN to mutualization & transfers, France says OUI to both.

The Euro was France’ desperate bid to collectivize the Bundesbank and thereby get leverage over Berlin macroeconomic policy. It has turned out the other way round: France is under the German thumb, with no where to hide. Yet French and some Club Med élites will not renounce the Euro: they have sunk their political capital into it. The Brussels village backs them, but lives on another planet to the real Europe.

Forcing banks to take a cut on depositors funds is just one more sign that the Euro élites will stop at nothing to salvage their project: mass unemployment; defenestrate democratically elected governments; blame the bankers; confiscate depositors funds; in TARGET 2, ensure that Germany’s liabilities to the south balloon.
This latter battle in the discrete corridors of the ECB, is where France is desperately fighting a battle to keep Germany on board by loading it with southern and French liabilities, contracted in Euros.

The Euro project has put back the pacification of Europe by decades.
All those who blamed people like me for being “sceptical”, as if scepticism was out of place in international affairs, will not just look stupid, but questions will have to be asked about why they backed a project which was so high risk.

The fact of the matter is that the wars between France and Germany(30 years war; 1806; 1870; 1914-18; 1939-45) is being fought out in the ECB over Target 2. That will undoubtedly go public, as has the Bundestag action to redefine EU law on the hoof.

About Jonathan Story, Professor Emeritus, INSEAD

Jonathan Story is Emeritus Professor of International Political Economy at INSEAD. Prior to joining INSEAD in 1974, he worked in Brussels and Washington, where he obtained his PhD from Johns Hopkins School of Advanced International Studies. He has held the Marusi Chair of Global Business at Rensselaer Polytechnic Institute, and is currently Distinguished Visiting Professor at the Graduate Schoold of Business, Fordham University, New York. He is preparing a monograph on China’s impact on the world political economy, and another on a proposal for a contextual approach to business studies. He has a chapter forthcoming on the Euro crisis. His latest book is China UnCovered: What you need to know to do business in China, (FT/ Pearson’s, 2010) ( His previous books include “China: The Race to Market” (FT/Pearsons, 2003), The Frontiers of Fortune, (Pitman’s, 1999); and The Political Economy of Financial Integration in Europe : The Battle of the Systems,(MIT Press, 1998) on monetary union and financial markets in the EU, and co-authored with Ingo Walter of NYU. His books have been translated into French, Italian, German, Spanish, Chinese, Korean and Arabic. He is also a co-author in the Oxford Handbook on Business and Government(2010), and has contributed numerous chapters in books and articles in professional journals. He is a regular contributor to newspapers, and has been four times winner of the European Case Clearing House “Best Case of the Year” award. His latest cases detail hotel investments in Egypt and Argentina, as well as a women’s garment manufacturer in Sri Lanka and a Chinese auto parts producer. He teaches courses on international business and the global political economy. At the INSEAD campus, in Fontainebleau and Singapore, he has taught European and world politics, markets, and business in the MBA, and PhD programs. He has taught on INSEAD’s flagship Advanced Management Programme for the last three decades, as well as on other Executive Development and Company Specific courses. Jonathan Story works with governments, international organisations and multinational corporations. He is married with four children, and, now, thirteen grandchildren. Besides English, he is fluent in French, German, Spanish, Italian, reads Portuguese and is learning Russian. He has a bass voice, and gives concerts, including Afro-American spirituals, Russian folk, classical opera and oratorio.
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