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Mar 21, 2013 | 00:33 GMT

4 mins read

Cyprus and a Crisis of Confidence in the EU

It can be difficult to separate the important from unimportant on any given day. Reflections mean to do exactly that — by thinking about what happened today, we can consider what might happen tomorrow.

Bailout negotiations in Cyprus are weakening popular confidence in the banking sector and the Cypriot government, and they could have consequences throughout the European Union. Cypriot President Nicos Anastasiades will meet with the heads of the country's political parties Thursday, following the Cypriot government proposal Wednesday to nationalize the country's pension funds and conduct an emergency bond sale to help raise the 5.8 billion euros (about $7.5 billion) needed to secure a bailout. But these proposals will do little to reverse a growing political crisis on the island.

The Cypriot crisis is one of confidence. First, confidence in the island's banking sector has been damaged. Even if the Cypriot government and the European Union decide not to apply the controversial one-off tax on banking deposits, a line has been crossed. Once a government openly discusses the possibility of taking away part of the bank deposits of a country, trust in that banking sector is shaken. As a result, Cyprus will have a hard time trying to restore the confidence that has been lost.

Second, a more important kind of confidence has weakened: the people's trust in the Cypriot government and in the European Union. In the past few days, the Cypriot population has seen their president discussing with unelected EU bureaucrats and representatives from other member countries the future of the country's banking deposits, some of which belong to wealthy Russians, but a significant amount of which belong to average Cypriot citizens, including teachers or retirees. 

This crisis of confidence was triggered when the Cypriot government, the European Union and the International Monetary Fund decided that the island would not get a traditional bailout (in which the distressed country would receive the full amount of necessary funding). Instead, the European Union and the International Monetary Fund agreed to grant Cyprus 10 billion of the 16 billion euros that the island needs, and Cyprus would find a way to come up with the rest. Creditors are adamant about ensuring that Cyprus carries part of the burden of its oversized banking sector. This agreement seemed convenient for Germany, where bailouts are unpopular, especially a bailout for an island that's accused of having opaque links to Russian money.

In other words, the European Union allowed Cyprus to endanger the most important part of its economic sector — its banks — for only 6 billion euros, a figure that is considerably smaller than the bailouts that were granted to Greece, Ireland, Portugal and Spain. The issue is not who approved this decision (the Cypriots, the Germans, the International Monetary Fund and the EU Commission are currently blaming each other), but the political consequences of that decision.

The Cypriot crisis is communicating to the rest of Europe that the European Union is failing to protect the interests of its citizens. Since the beginning of the crisis, the austerity measures proposed by the European Union and implemented by national governments weakened public confidence in the bloc and in mainstream politicians, since the measures created a recession and high unemployment rates. In many cases, the anti-EU sentiment took the form of anti-German sentiment because Berlin is seen as the main proponent for austerity. Whenever there is a protest against austerity, people blame both their local governments and Berlin.

The situation in Cyprus will likely take this anti-European sentiment to a new level. In most cases, austerity measures have cut spending in social programs, increased taxes and reduced salaries. So far, bank deposits have been off limits. Moreover, during the early stages of the international crisis, EU leaders promised that deposits under 100,000 euros would be protected. Depositors in Italy or Spain may think their savings are protected because their countries are more politically and economically important than Cyprus, meaning they would not be subject to a similar treatment. But there is no certainty that this would not happen to them in the future. This fear is even greater for smaller countries with troubled banking sectors, such as Slovenia.

As a result, the Cypriot crisis reopens the question of the legitimacy of the European Union. Increasingly, Europeans are seeing the European Union as something that has been imposed on them and is negatively affecting their lives instead of improving them.

There is a long philosophical tradition in the West that links a government's legitimacy to the way it protects its population's interests. Trust in the government is a key condition for democracy, and a government's legitimacy is weakened if it lacks the consent of the governed. The European Union is not a government in the traditional sense of the term, but it does need popular consent to subsist. The Europeans are increasingly seeing the bloc as an external force that acts against the will of the local populations, and the Cypriot crisis is only increasing questions regarding its legitimacy.

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