Crisis in Cyprus threatens EU role and legitimacy

[March 22, 2013]  BERLIN (AP) -- By rejecting an EU bailout and turning to Russia for help, Cyprus has exposed the growing frustration and dwindling solidarity within the European Union, a bloc meant to bring the continent closer together after World War II.

While talks about a Russian rescue appeared stalled Friday, experts noted that the idea of seeking Russian money alone raised doubts about the legitimacy of the European project -- notably over perceived German dominance and threats to national sovereignty. The extraordinary spectacle of an EU member seeking salvation from the old Cold War enemy has raised deep questions about how far Europe can or will go to take care of its own.

"It will raise many issues about the legitimacy of the European Union," said Vassilis Monastiriotis, an expert on southeastern Europe at the London School of Economics. "(Other) countries may seek financial help from China or Arab states and this may disintegrate the European Union, making it less relevant as an institution."

Ever since the financial crisis five years ago put pressure on heavily indebted countries -- from Greece to Portugal to Ireland -- the bailouts have become as much a political as an economic issue, with wealthy Germany taking on the role of bogeyman because of its insistence on strict austerity measures as a condition for help.

The proposed bailout for Cyprus ratcheted up the potential pain by demanding for the first time that depositors help pay for the rescue with their own savings.

Senior European lawmakers raised the alarm Thursday at the possibility of letting Russia ride to the rescue of a nation that represents -- with a mere 0.2 percent -- a tiny part of the eurozone economy. Many Russians have business interests and hefty bank deposits on the island, and Moscow -- flush with oil and gas rubles -- could easily afford to extend a 2.5 billion euro loan that it gave Cyprus in 2011 and lower repayment rates.

In return for provide fresh cash or taking over one of the island's ailing banks, analysts have suggested that Russia might demand an interest in natural gas fields that Cyprus has discovered in the Mediterranean.

But Russia's finance minister, Anton Siluanov, told Russian news agencies that investors weren't interested and a Russian loan would push Cyprus over the debt limit demanded by the EU.

"We need a European solution to the Cyprus problem, not an external one," European Parliament lawmakers from across the political spectrum said in a statement.

The biggest hurdle to a quick deal is without doubt Germany.

Government officials from Chancellor Angela Merkel down know that it would be difficult to sell her countrymen on the idea of bailing out Cyprus, because unlike with Greece, Italy or Spain, there is little sympathy for a country seen as a haven for tax evasion and the ill-gotten gains of shady Russian oligarchs.

That leaves little room for Merkel to maneuver at home, especially as she is seeking re-election this year.

Germany's opposition Social Democrats, too, have insisted that Cyprus needs to change its business model but warned of the risk of letting the Cyprus problem drag on.

"The crisis is causing serious collateral damage," said Michael Roth, the party's spokesman on Europe. "There's a crisis of faith and solidarity in Europe and at a time when more solidarity would be necessary it's the bean counters who are calling the shots."

Roth said much of the problem lay in mistaken perceptions on both sides. Germans needed to be reminded that they have profited from the overall European economic crisis that has produced low interest rates; Greeks, Irish and Cypriots needed to accept that the bailout packages weren't all about austerity but contained a good deal of financial aid, too, he said.

In Cyprus, much of the fury arose over a proposal to tap the bank accounts of all savers, breaking a taboo in Europe where deposits of up to 100,000 euros ($129,000) are meant to be protected by law. The plan was backed by Cyprus itself before street protests prompted a U-turn in parliament Tuesday.

Some experts say resentment toward Cyprus has compounded the problem.

"I think patience with Cyprus was running out also on other issues, such as its intransigence over the (Turkish) north and its history of encouraging tax evasion," said Josef Janning, a political scientist at the German Council on Foreign Relations, an independent think tank in Berlin.

Cyprus has refused to budge in long-running negotiations to find a political solution for the breakaway Turkish north of the island, which Nicosia refuses to recognize.

Germany's Frankfurter Allgemeine Zeitung newspaper, a conservative paper widely read in government and business circles, accused Cyprus on Thursday of trying to blackmail the European Union and warned that if it succeeded, other countries such as Greece, Portugal, Spain, Italy and Ireland might follow suit.

"If this strategy of blackmail in Cyprus works then there would indeed be a domino effect," the paper said in an op-ed. "The basis of the entire rescue policy, which can be summed up in the idea that solidarity entails (economic) solidity, would lose credibility."

In Spain, Prime Minister Mariano Rajoy didn't mention Merkel or Germany but criticized the plan for Cyprus in comments to reporters, saying he was "opposed to people losing their savings, because they are not in any way responsible in this matter."

Experts said Spanish politicians are nervous about the impact of the Cyprus deal, but not in panic mode at this point.

"Due to the numerous economic differences between the two countries, we have not yet seen serious spillovers in Spain due to this deal. However, the fear is that this deal could lead to an overall loss of confidence in Spanish banks, which in turn could lead to future political problems," said Morten Olsen, an economics professor at the IESE Business School in Madrid.

Germany's Foreign Minister warned Friday that Cyprus was revealing Europe's inability to make decisions.

"We all need to work hard to overcome this challenge," he told ARD public television, before insisting, once again, that German money comes with strings attached. "We are ready to show solidarity but in return those countries that are asking for solidarity need to be prepared to do their homework. If that doesn't happen, then it (solidarity) can't be granted. "

[Associated Press; By FRANK JORDANS]

AP writers Alan Clendenning and Ciaran Giles contributed to this story from Madrid.

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