Berlin and Paris pursue the financial fragmentation of Eurozone

From left to right: Pierre Moscovici, French Minister of Finance, Christine Lagarde, Managing Director of the IMF, Wolfgang Schauble, German Federal Minister for Finance, Maria Fekter, Austrian Federal Minister for Finance. Eurogroup of 24/03/2013. (Council of the European Union photographic library).

The three EU independent authorities which supervise the financial sector of the Union, namely the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA), collectively known as the three European Supervisory Authorities (ESAs), issued yesterday their first joint report ringing the bell of Eurozone fragmentation danger after what happened in Cyprus. Closing their main remarks they stress that, the “Recent events (in Cyprus) manifest the risk of further fragmentation of the single market and underscore the need for closer coordination and integration, including in supervisory colleges, and through full implementation of the banking union”.

 At this point it must be noted that the fragmentation of Eurozone’s financial volume and the return to the pre-euro era, where European national markets maintained only limited relations, seems to be already an irreversible process. Despite the lamentations of the European Central Bank about this, the truth is that Germany and France after some point in time favoured the disruption of the Eurozone financial market. Everything started in 2010-2011 with the eruption of the sovereign credit crisis in three countries Greece, Portugal and Ireland.

 Who seeks fragmentation?

 All along the past three crisis years the surplus countries like Germany, France, the Netherlands and Austria were terrified with the contagion effect. That is the fear the illness which hit the above three countries and later on Italy and Spain could spread and infest their own markets and thus increase their borrowing cost to unsustainable levels. Until June 2012 this contagion fear was very real. Market analysts and investors were insisting that the problems of south Eurozone could bring down also France and Germany.

Not to forget that the big banks of those two major Eurozone countries had a huge exposure to south Europe. If the ECB had not favoured the German and the French lenders by acquiring the bulk of their toxic Greek, Spanish, Portuguese, Italian and Irish bonds, today Berlin and Paris could have joined Athens and Madrid in staging everyday street rallies. Gradually however and more so after the ECB undertook the large part of the toxic southern bonds, Germany felt at ease and its financial markets started behaving completely differently than the markets of Italy and Spain.

Actually sometime after the summer of 2012 the borrowing rates for Germany became negative, while Italy and Spain had to pay around 6%-7% for their debt. From that time onwards the fragmentation of Eurozone’s financial market was a reality. Germany and France stopped being afraid of any contagion effect from the south Europe disease.

 The Cyprus point

The financial markets and investors learned to distinguish well between south and north. So reassured those two countries felt for not sharing anything anymore with the southerners that decided to completely destroy the Cypriot banking system and impose the confiscation of its unsecured deposits up to the point of complete annihilation. 

 There is no doubt by now that Eurozone’s financial system is again completely fragmented as it was for centuries, until the turn of the millennium. The possibility of becoming again the unified system it was during the brief period of 2002-2008 is a very long-term bet. ECB’s monetary policies for cheap money don’t cross the Alps southwards and consequently don’t reach Athens or Rome let alone Nicosia. The question is though if this was an intended policy or the outcome of an unseen before crisis.

 As they say the truth is usually somewhere in between. At the beginning, fragmentation was a natural phenomenon. In 2012 however it became a policy target for Germany and France, while recently the case of Cyprus proved that fragmentation is not only a target but a standard reality to count upon. Germany and France wanted to show everybody that Eurozone is mainly Berlin and Paris. Everybody else is from now on expendable. Even if markets do not believe the whole story, the present degree of fragmentation of Eurozone’s financial markets is enough to offer Germany and France very low-interest rates for their borrowing and this is all there is to it.  

 Berlin and Paris together decided to destroy Cyprus exactly for this reason. They don’t want the South to sell the same financial products as the North. Germany and France showed to the rest of the world where the real Eurozone financial products are for sale. The ESAs are quite right in recognising that what happened in Cyprus “manifest the risk of further fragmentation”. It is exactly like that.