The confusion and delay that surrounded decisions on the Cyprus assistance plan were not only due to Cypriot intransigence. Rather, they reveal a need to radically rethink Eurogroup and Troika working methods, argued Economic and Monetary Affairs Committee MEPs in Wednesday’s debate with Commissioner Olli Rehn and ECB Executive Board member Jorg Asmussen.
In the second of three committee meetings being held to dissect the Cyprus plan, Messrs Rehn and Asmussen fielded questions on the positions taken by the various players in negotiations for an agreement on the Cypriot package, on the ECB’s controversial emergency liquidity assistance (ELA) to Laiki bank, on why the Commission had not identified Cyprus’ bank sector as a problem, and on the exact amount needed for bank recapitalisation.
Messrs Rehn and Asmussen both affirmed that a large part of the blame for the confusion lay with the Cypriot authorities themselves. However Mr Rehn also admitted that the workings of the Eurogroup were far from perfect. “If the IMF takes decisions with 80% majorities, why on earth should the Eurozone decide with unanimity?”, he asked. Mr Asmussen, for his part, accepted that the Troika was a “crisis mode setup” which in the long term would need to be replaced by a more transparent system. He also sought to justify the ECB’s continued ELA to Laiki bank, but MEPs did not seem to be convinced.
MEPs also voiced concerns that the ECB’s recovery forecasts for Cyprus were overly optimistic and could thus erode credibility, which would in turn make the crisis more costly. Mr Asmussen stood by the forecasts, but warned that risks were still high and therefore economic expectations might need to be revised.
Lending to the real economy
MEPs also asked what the ECB and the Commission could do to ensure that loans are made available to households and small businesses, rather than merely propping up the country’s banks. Mr Asmussen agreed that this was a fundamental issue but said that that the ECB could do little more to get banks to lend to the real economy. He nonetheless noted that the monetary transmission mechanism (whereby banks lend to each other, which is a prerequisite for their lending elsewhere) was performing slightly better.
On a more general note, some MEPs asked whether other countries with similarly large banking sectors could be the next weak link. Mr Asmussen replied that the size of the sector was not at all the sole determining factor. “No other EU country’s banking sector is comparable to Cyprus“, he added.