Vicky Pryce, author of Greekonomics: The euro crisis and why politicians don't get it, on Cyprus' loan request and what it means: it's all to play for...
This past week Cyprus became the fifth Eurozone country asking for a bail-out to support its economy – like Spain the problem has been in its banking sector which had over- extended itself and has been particularly burdened by its exposure to Greece. The Russians, on whose spending and financial inter-mediation much of the Cypriot economy depends, have been lending it billions so far to keep the banking sector going but the situation has been deteriorating fast and the call was eventually made in advance of the European leaders' summit on the 28th of June. That's where the similarities with Spain end. It will be a 'proper' bail out with conditions attached, as Cyprus is apparently not deemed to have tried as hard as Spain to reduce the deficit and encourage reforms.
There are of course a number of issues that Cyprus had to face that are specific to that country. However, looking ahead it is worth pondering what a small open economy can really do by itself to kick start growth which would help to ease the pain. And it is the concern about lack of growth that has affected market sentiment, not only for the smaller countries but also increasingly the larger ones, where the problems of the baking sector are even more threatening for the European economy as a whole. Witness the Spanish problems, which have been well documented. The market relief once the €100b bail-out was first announced evaporated in just a few hours. And the focus of attention then shifted to Italy where the technocratic government of Mario Monti, though praised from the outside, is having difficulty getting the much needed reforms implemented and political opposition is resurfacing . For the first time in many years of visiting Italy there were shops boarded up, with people openly questioning what the euro had really done for them. Labour market reforms remain stuck and closed shops still prevail. Waiting for a taxi at a provincial airport took forever; a forlorn car would appear every few minutes making no dent in the queue – all due, as it was explained to me, to the very small number of licences issued for life, which are then sold off at huge profit when the taxi driver retires.
Italy managed to raise some short term finance this week but longer term rates remain prohibitive. And yet some €28b of Italian sovereign debt needs to be refinanced this year.
So what next? The forthcoming summit will give an indication of where the thinking is among the various participants of this drama. The Germans are portrayed as intransigent. Nein, Nein, Nein was the headline that dominated the front page of one UK newspaper this week, referring to Mrs Merkel's apparent dismissal of mutualising eurozone debt through eurobonds. Hollande in France, Monti in Italy and Lagarde at the IMF all think they are a good idea. But the Germans will not agree to something that leaves 'profligate' nations (as they see it) to do as they please, with Germany footing the bill. In advance of the summit, the European Commission has put forward its own plan on how sovereignty over fiscal issues could be passed from nations to the Commission, which is bound to prove controversial, and the discussion over what a 'banking union' might consist of remains unclear, particularly in relation to whether an EU regulator, if created, would look after only the biggest or all the banks in the region?
All still up for grabs. And all still unsettling. The markets have already discounted the likelihood that this summit will get us much forward. But it should help clarify a bit more who is occupying what position, whether there is a prospect that a solution might be found in the future, whether there is any appetite to go for growth and how that can be achieved when all the talk is about austerity.
Vicky Pryce is a Greek born economist and former Joint Head of the UK Government Economic Service. Read Vicky's piece on her sister's efforts to help feed desperate Greek citizens here. Also read why she believes the euro design is fatally flawed. Vicky is the author of a new report on industrial policy for CentreForum. Find out why she believes Britain needs a 4th generation industrial policy here.