If you thought it was risky for banks in Cyprus to have assets about eight times the national gross domestic product, then what is one to make of Luxembourg, where the multiple is nearly 23?This is part of the larger problem of the eurozone. They have a currency union without a banking union. But a currency union without capital controls, which the eurozone has been until the Cyprus crisis when capital controls were imposed, is one in which depositors can move money freely from one country to another. But if there is no unified banking regulation and, critically important, a common banking insurance system for the currency zone, it means that national government become responsible for bailing out failing banks under their jurisdiction even though international capital flows resulting from common currency-zone policies may be what causes them to fail.
Worryingly for Luxembourg, there’s a new idea afloat that European Union nations, even small ones, should take responsibility for saving banks operating within their borders, instead of falling back on the EU for help.
In other words, a set of policies highly conducive to bank runs, leaving national bankruptcy in their wake. As Coy writes, "There’s no realistic way for Luxembourg to rescue its banking sector if serious trouble develops."
And the only alternative German Chancellor Angela "Frau Fritz" Merkel will allow in such an eventuality is austerity, austerity, austerity.
Andreas Rinke reports for Reuters that Luxembourg's foreign minister has some harsh words for Germany on the subject (Luxembourg minister says Germany seeks euro zone "hegemony" 03/26/2103):
Germany, the European Union's biggest and most powerful economy, had insisted that wealthy depositors in Cyprus's banks contribute to the island's bailout and said the crisis has killed a "business model" based on low taxes and attracting large foreign deposits.
"Germany does not have the right to decide on the business model for other countries in the EU," Foreign Minister Jean Asselborn told Reuters. "It must not be the case that under the cover of financially technical issues other countries are choked."
"It cannot be that Germany, France and Britain say 'we need financial centers in these three big countries and others must stop'."
Tags: angela merkel, austerity economics, cyprus, eu, euro, european union, luxembourg