Germany responds to Cyprus President saying austerity making EU financial crisis worse

Germany has responded to the Cyprus President saying that austerity is making the EU financial crisis worse.  According to the Guardian, German Chancellor Angela Merkel said that Cyprus must drop its opposition to privatization of state assets or it would not get a bailout.

Cyprus President observed

"It must be admitted that policies implemented on a pan-European level have not succeeded in providing a solution to the economic problems created by the crisis," ...

"On the contrary, they have recycled and worsened economic and social injustice," he added....

"The future of a United Europe cannot be poverty, deprivation, unemployment and homelessness."

Christofias said the EU's "one-sided" approach has failed to achieve growth in those recession-hit countries it has tried to help.

"A different approach is needed which will emphasise development, social cohesion and true solidarity within the Union. It is with sadness that we observe the absence of such policies."

Please re-read the highlighted text and Chancellor Merkel's response.

Angela Merkel has just given a clear signal that Cyprus will not get its bailout until it drops its opposition to wide-ranging economic reforms. 

During a press conference in Berlin, the German chancellor insisted the aid deal would not be completed without Nicosia agreeing to a programme including privatising some state-controlled companies. 

Merkel said (via Reuters): 

We agree it is important that the troika should talk with Cyprus and that there can be no special conditions for Cyprus because we have common rules in Europe....

As a correspondent to the Guardian said,

There is no love lost between Christofias and the EU but the German chancellor Angela Merkel's dark insinuations that there will be no money until the communist president leaves will end the leader's term in power on an even more sour note. 

Regular readers will recall that Christofias chose to end Cyprus’ stint at the helm of the rotating EU presidency with a rousing speech on why the bloc wasn't working. 

More than ever, he said, the European Union was in urgent need of re-embracing its founding principle of "solidarity." 

Ironically, it now seems that solidarity is the last thing EU partners are willing to show the leader who has repeatedly denounced the onerous terms and conditions attached to rescue funds from the EU, ECB and IMF.

For regular readers of this blog, none of this is surprising.

Germany adopted the Japanese Model for handling a bank solvency led financial crisis in order to protect its banks' book capital levels.  Nobody made its banks make loans to Cyprus or the Cypus banks that exceeded the ability of Cyprus or the Cyprus banks to repay.  Yet, Germany is trying to protect its banks from the results of these bad decisions.

In doing so, Germany is creating for Cyprus and other EU debtor countries, a future of poverty, deprivation, unemployment and homelessness.

Regular readers know that there is an alternative to the Japanese Model that achieves the positive outcome that the Cyprus President advocated.  The alternative is the Swedish Model which requires the banks to absorb the losses on the excess debt in the financial system.

The result is that that real economy in countries like Cyprus is protected and the debt in the financial system is reduced to a level that the borrowers can afford to service.

One of the benefits to Germany from adopting the Swedish Model is that it also protects the real economy in Germany.

You see, Germany has an export oriented economy.  As the EU economy collapses around it, it limits what Germany can export.  As Germany's exports collapse, so to does its economy.  This can be seen in its current economic slowdown.