Blog Post

German views on aid for Cyprus

After the Cyprus’s application for EU aid in June 2012, the negotiations on the programme are now getting concrete. The discussion in Germany about possible aid that is estimated between EUR 12 and 17.5 billion for the period 2013-2016 is focusing on the Cypriot financial sector which doesn’t enjoy a good reputation. In the German media, Cyprus and its banks are widely seen –rightly or wrongly - as a tax haven and a money-laundering base.

By: Date: January 16, 2013 Topic: European Macroeconomics & Governance

After the Cyprus’s application for EU aid in June 2012, the negotiations on the programme are now getting concrete. The discussion in Germany about possible aid that is estimated between EUR 12 and 17.5 billion for the period 2013-2016 is focusing on the Cypriot financial sector which doesn’t enjoy a good reputation. In the German media, Cyprus and its banks are widely seen –rightly or wrongly – as a tax haven and a money-laundering base.

The Spiegel online wrote already in November last year about a German intelligence report revealing that the main beneficiaries of the aid might be rich Russians who have invested illegal money in Cypriot banks. And indeed, this seems to be the main point making German public opinion reluctant to this aid.

Florian Kolf writes in his column on 10 January in the Handelsblatt that the discussion about the financial aid for Cyprus reflects the general absurdity of EU rescue programmes resumed by the following facts: a Eurozone member country whose business model is based on money laundering for wealthy Russians, the fact that such an aid will probably end directly in the pockets of those “dubious” Russian business men,  all this “insanity” arranged by a Communist government, and the fact that the adhesion contract between Cyprus and EU has been signed in Athens – ” Any questions? “

Tobias Piller states in the FAZ on 14 January 2013 that, apparently, the Cypriots do not really want to negotiate about services in return for eventual aids.  According to Piller, there are important questions to be answered before receiving any aid, e.g. to what extent banks have been financed by deposits of the “gray area in Eastern Europe”. If these answers will not be answered and if the Cypriot government continues propping up its banks with central bank money, the island might lose its credibility necessary for both a membership in the monetary union as well as for any aid from Brussels.

Stefan Schultz writes in the Spiegel that the case of Cyprus shows a basic mistake in the construction of the EU rescue mechanisms. While the billions of euros going to the “trouble spots” of the euro zone avoid an uncontrolled broadening of the crisis, they aggravate at the same time inequalities in Europe as the money might go to the “wrong people”.  Therefore, as proposed by the IMF, one possible solution would be a haircut as already done in Greece. This solution would have the advantage to involve private creditors and to relieve so partly German taxpayers. However, this would not be a way out of the inequalities as Cypriot banks would have tremendous losses and would need again more financial aid from European taxpayers. Thus, taxpayers would in the end in any way guarantee for “Russian black money”.  Therefore, financial expert Schick of the Green party thinks that the case of Cyprus will be the first country, where the German government must claim far-reaching conditions such as unconditional cooperation in money laundering and tax avoidance.

Both politicians in the German government as well as in the opposition are skeptical about a bailout of Cypriot banks. For instance,  Volker Kauder , Chairman of the CDU/CSU parliamentary group in the Bundestag explains that he “does not want to guarantee for Russian black money”.
 Marcus Ferber, a leading German conservative in the European Parliament (EP) told the Süddeutsche Zeitung that there must be a guarantee “that we are helping Cyprus’ citizens and not Russian oligarchs”.
Regarding the opposition, SPD head Sigmar Gabriel states that , at the moment he doesn’t see enough  arguments for a aid as  he cannot imagine that “the German tax payer rescues Cypriot banks, whose business model is based on assistance to tax fraud”. 

According to the Spiegel, the main danger might be the SPD voting against aid for Cyprus. This vote is necessary in order to accord aid to Cyprus and, therefore, help for Cyprus may not be forthcoming as Chancellor Angela Merkel is no longer able to rely on her own parliamentary majority to push through euro zone bailout packages. With elections looming this autumn, the SPD seems to have become less willing to follow Merkel’s euro strategy. Widespread concerns about bank deposits from Russian oligarchs as well as accusations that the country doesn’t combat money laundering may provide the SPD, and notably SPD chancellor candidate Peer Steinbrück,  with an opportunity to detach itself from Merkel’s crisis management strategy.

Cerstin Gammelin says in the Süddeutsche Zeitung that Cyprus is partly blamable for the current dilemma as it attracts business men of all over the world what lead to an oversize banking sector (relative to Cyprus’ GDP), and the close cooperation between the Greek and Cypriot financial institutions that became its doom in the crisis where the Cypriots lost almost an amount equal to a quarter of  their GDP.  Moreover, the  Cypriot citizenship right according the right of citizenship to foreigners who invest at least an annual amount of EUR 15 million directly on Cyrpus and the British business law that rules in Cyprus is probably party at the origin of the current situation.
However, she writes that one cannot blame uniquely Cyprus for the situation. An anecdote underlines that the Social Democrats might not be “innocent in this dilemma”: under SPD minister Hans Eichel, the UK could impose its interests in the European directive on interest taxes.

Sven Giegold , economic spokesman of the Greens at the EP  criticizes in the Handelsblatt the position of CDU and FDP politicians such as Rainer Brüderle stating that it is “not communicable ” that German tax payers should guarantee for “Russian black money” in Cyprus. Giegold says that the government detracts with such statements from the fundamental problem, namely that there is no tax equality in Europe.  Without a sustainable and fair tax system in Europe, a liability of the community will remain difficult to communicate.  According to Giegold, a European fiscal pact could be the solution to this dilemma by avoiding in the future tax havens in Europe and setting minimum tax rates for businesses.

Most recently, Eurointelligence writes on 16 January that German Finance Minister Wolfgang Schäuble states that there will be no financial aid for Cyprus until the island complies with international standards on money laundering. According to Eurointelligence, Schäuble likewise criticizes the decision by the Cypriot president not to implement the privatization programme as demanded by the troika. Therefore, there will be no formal decision on a Cyprus programme before the planned Cypriot elections in February this year.


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