European umbilical cordon under siege

MrTopStep.com

Cyprus's central bank chief said Tuesday that large depositors at the island's biggest lender, Bank of Cyprus Pcl, could lose as much as 40% on their deposits. In a television interview later, the finance minister said large uninsured deposit holders at the second-biggest, Cyprus Popular Bank Pcl, might only see one-fifth of their money returned and could wait several years before being paid back.

"Realistically, very little will be returned," Finance Minister Michalis Sarris said in the interview broadcast on state television. "The amount [returned], could be 20%. Certainly, for depositors above €100,000 it could be a very significant blow," he said.

Meanwhile Dijsselbloem, as President of the Eurogroup (whose job is to communicate to the public the decisions taken by the group) in an interview with Reuters and the FT,  essentially he said that Europeans can count on similar fate for uninsured deposits elsewhere in the euro zone if their banking systems need to be restructured in the future.

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If there is a risk in a bank, our first question should be 'Okay, what are you in the bank going to do about that? What can you do to recapitalize yourself?'" said Dijsselbloem in the interview. "If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalizing the bank, and if necessary the uninsured deposit holders.

Dijsselbloem's comments seemed to anticipate and perhaps even invite the negative market reaction that ensued and later caused the Eurogroup to issue a clarification.

At the sametime, Luxembourg's  foreign minister accused Germany of "striving for hegemony" in the euro zone by telling Cyprus what business model it should pursue:

Germany does not have the right to decide on the business model for other countries in the EU..It must not be the case that under the cover of financially technical issues other countries are choked.

Foreign Minister Jean Asselborn told Reuters.

This  sequence of events led me to ask: are we witnessing the political bankruptcy of Europe?

The symptoms were highlighted to the way the EU handled the Cypriot financial collapse:

Until Cyprus, the EU had always maintained two prime objectives: keeping all members in the Eurozone, and guaranteeing all bank deposits under €100,000. These objectives exist from now on only in words, reason why the famous economist Paul Krugman  from the NYT page declares:

Cyprus should leave the euro. Now.The reason is straightforward: staying in the euro means an incredibly severe depression, which will last for many years while Cyprus tries to build a new export sector. Leaving the euro, and letting the new currency fall sharply, would greatly accelerate that rebuilding.If you look at Cyprus’s trade profile, you see just how much damage the country is about to sustain. This is a highly open economy with just two major exports, banking services and tourism — and one of them just disappeared. This would lead to a severe slump on its own. On top of that, the troika is demanding major new austerity, even though the country supposedly has rough primary (non-interest) budget balance. I wouldn’t be surprised to see a 20 percent fall in real GDP.

For sure, the European umbilical cordon is under siege, will it hold or will it break?   Actually to answer to the previous question we need to understand which are the EU new objectives, and if we all still have faith in "Europe".
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