John Cassidy says the David and Goliath story of Cyprus versus Germany has just one problem—the Germans are basically right.
I think that’s true. The basic German view that the German taxpayer should bear less than 100% of the burden of rescuing the Cypriot banking system, and the creditors of the Cypriot banking system should bear more than 0% of the burden is very sensible. The decision of the Cyprus’ president to organize a version of that principle that involved haircutting small depositors in order to protect the interests of Russian tax dodgers was perverse, but that’s on him. If the Germans made a mistake here it was by being too deferential to President Anastasiades horribly flawed judgment. The Cypriots have been flailing aorund trying to find a solution that allows them to keep operating as an offshore banking sector, but the German government is correct to but zero (or even negative) weight on this as a policy priority.
The reason it’s sometimes difficult to see that the Germans are right about Cyprus is that their political consensus is so wrong about Europe. Having the European Central Bank run an excessively German-focused monetary policy (indeed one that’s arguably even too tight for Germany) is greatly exacerbating all these fiscal problems. Then Germany, as the party with the fiscal capacity, needs to pay some of the price at which point German voters lash out at peripheral citizens whose economies have been put in a situation where failure is inevitable. Indeed, contemplating the question of why Germany let a tiny offshore banking hub that had already lost de facto control over 40 percent of its small landmass into the eurozone in the first place underscores the generally low quality of thinking about how this whole operation is supposed to work.
But on Cyprus, they’ve got it right.