Coalition parliamentarians have rarely seen Chancellor Angela Merkel so upset. Whether it has been election defeats, internal bickering in the government or the euro crisis, she almost always finds moderate words even as others panic. She has earned a reputation for being cool and calculating.
But the situation in Cyprus appears to have frayed her nerves. In meetings with parliamentarians from her conservative faction and later with those from her junior coalition partner, the Free Democrats (FDP), it quickly became clear on Friday that her patience with Cyprus is running out. Together with Finance Minister Wolfgang Schäuble, she left no doubt as to her frustration with Nicosia's new plan for raising 5.8 billion in badly needed capital.
Merkel disapproves of the Cypriot proposal, which involves bundling state assets into a "Solidarity Fund" that includes the country's retirement fund to back bond issues. According to reports on Friday, she is not alone. The troika, made up of the European Commission, the European Central Bank and the International Monetary Fund, agrees with her assessment.
What happens next? "I hope that it doesn't result in a crash," Merkel told FDP parliamentarians according to a meeting participant. Merkel has long warned of a potential domino effect should a euro-zone member state enter insolvency. But now, her government is no longer excluding the possibility.
The chancellor is particularly frustrated by the lack of communication with Cypriot leaders even as the situation worsens dramatically. Some in her party have even used the word "autistic" to describe Nicosia's apparent unwillingness to communicate with Berlin. "What we have never experienced before is that, over a period of days, there has been no contact with the EU or with the troika," Merkel reportedly told the parliamentarians.
Sliding into Insolvency
And they have been critical days. On Tuesday, the Cypriot parliament rejected a euro-zone bailout package which included 10 billion from the European Stability Mechanism (ESM), the permanent euro-zone aid fund, and 5.8 billion to be raised via a one-time levy on savings accounts held with Cypriot banks. Since then, Nicosia has frantically been trying to assemble "Plan B." But they have provided little in the way of reliable information about that plan to those who will ultimately be responsible for preventing the country from sliding into insolvency.
Even without precise details, however, Berlin is adamant about one aspect of the Solidarity Fund: Plundering the country's retirement fund is out of the question, Merkel said, according to conservative parliamentarians present at the Friday morning meetings. She also issued a clear warning: Cyprus should not test the troika's patience. Volker Kauder, a leading member of Merkel's Christian Democrats in parliament, had previously said that "Cyprus is playing with fire."
"We want Cyprus to remain in the euro zone," Merkel emphasized during her meeting with FDP parliamentarians. But, she said angrily according to participants, the country is "taking things further than we have ever seen before." Europe, she said, must not abandon its principles, otherwise "the whole thing" will be in doubt. She was referring to the principle that she has followed as the euro crisis has progressed: Europe will offer countries solidarity and aid, but only in exchange for efforts to improve fiscal responsibility. Merkel made clear that she hasn't seen those efforts from Cyprus. The country hasn't yet realized that its business model has come to an end, Merkel told parliamentarians on Friday.
Cyprus is not comparable with previous euro-zone bailouts primarily because of the inflated size of its banking sector. Many rich Russians have deposited their money in banks on the island. Some 70 billion are sitting in Cypriot savings accounts -- against an annual gross domestic product of just 18 billion.
That is one reason the original bailout package included the controversial levy on savings account holders. The EU was also eager to avoid inflating Cypriot sovereign debt to unsustainable levels. On Friday morning, Merkel defended the levy once again, saying that interest rates on savings accounts are much higher in Cyprus than they are in Germany and that such a one-time tax was thus acceptable. She did admit, however, that smaller accounts should be excluded from the tax.
In the original plan they were not excluded, though. Germany was opposed to making exceptions -- which has justifiably triggered criticism of both Schäuble and Merkel. Indeed, it wasn't just the Cypriots who found the tax on smaller savings accounts to be inexcusable, to the point that trust in banks threatened to erode across Europe. The German government has since admitted that communication was suboptimal at the European level. Had it been better, it is possible that the entire Cypriot drama could have been avoided altogether.
Now, time is running out. It seems unlikely that any sort of levy will be part of whatever package is put together to help ward off Cypriot insolvency. But hopes for such a package -- one that is acceptable to Germany and Europe -- are disappearing. Coalition parliamentarians in Berlin are becoming increasingly pessimistic. When asked whether he thought a Cypriot bankruptcy was possible, senior CDU politician Norbert Barthle said: "It cannot be ruled out."
Merkel, for her part, managed to force herself on Friday to return to the moderate words for which she has become famous. She insisted she will try to "be emotionally wise." On this particular Friday, it wasn't easy.
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