Cyprus Bailout Gone Bad: German Domestic Politics at Play?

Cyprus Bailout Gone Bad: German Domestic Politics at Play?
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Amid several on-going developments in Cyprus bailout, the Cypriot finance ministry proposed a different term today to protect small savers. Under the new plan, depositors with less than 20,000 euros in the bank would pay nothing. Those having deposits between 20,000 and 100,000 would pay 6.75 percent one-time tax while savings of more than 100,000 will be taxed at 9.9 percent. The latest proposal raises doubt whether the country will be able to raise 5.8 billion euros through bank deposit levies that were a key part of the bailout.

Cyprus Bailout Gone Bad: German Domestic Politics at Play?

If Cyprus levies those taxes, it will upset the Russian billionaires who have invested and deposited tons of money in Cyprian banks. The Russians may pull their money out of the country, pushing it further into the turmoil it must avoid. On the other hand, thousands of protesters across Cyprus have raised voice against the levies on their bank savings.

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So, how did the idea of taxing bank deposits pop up? Well, like everything else in Europe, the roots go back to Germany. There are two possible reasons why Germany triggered a deal that shocked the entire world. One, it doesn’t like tax havens for wealthy. Two, the internal German politics.

Germany Doesn’t Like Tax Havens for the Rich

Cypriot banks have approximately 68 billion euros in bank deposits, and over 40 percent of that belongs to foreigners, most of them wealthy Russians. Angela Merkel said anybody who has money deposited in Cyprus must contribute to the bailout. German finance minister Wolfgang Schaeuble initiated the idea of taking a slice from the bank savings. In addition, when the protests started, Wolfgang Schaeuble distanced himself, saying that it was the ECB and European Commission that forced for this solution. But protesters told BBC that it was Germany that pushed hard for taxing the savings.

Angela Merkel’s Re-election Campaign

A newly launched party, Alternative for Germany, has challenged Germany’s support to one after another bailout. The party comprises of well-known German business leaders and economists. This anti-euro party could threaten Merkel’s re-election campaign by attracting votes from her conservative bloc.

The Alternative For Germany party is unlikely to attract enough people to win seats in German parliament, according to the Wall Street Journal. But the party has the possibility to attract enough votes to prevent the current coalition government led by Angela Merkel from returning to power.

Germans are frustrated with the country’s current politics, and most of them want Germany to come out of the single currency. For them, the anti-euro party could be a ray of hope. Recent polls suggest that one in four Germans said they will back a party that wants to take Germany out of the Eurozone. Most of the people who favored anti-euro party were disgruntled conservatives and first time voters. If pollsters could be converted into actual voters, that would worry the current government. And there are obvious signs indicating this scenario.

In that case, Merkel’s current coalition of Christian Democrats, their Bavarian sister party and Free Democrats, will have to turn to Social Democrats. That would force Merkel to abandon her conservative agenda. Despite rising unease, Germans have supported Angela Merkel’s costly bailout plans. But as Eurozone is being blown up by one after another upheaval, crisis-weary population of Germany is more likely to support the anti-euro party.

Therefore, the Cyprus bailout came as a striking opportunity for Angela Merkel to show Germans that she would no longer tolerate bailing out another “lazy southern European country” with the taxpayers’ money. The move will help her win back conservative voters who would potentially go to the anti-euro party.

H/T Naufal Sanaullah

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