Scapegoat for austerity
European commissioner Olli Rehn is facing calls to resign over his handling of the EU's botched bailout deal for Cyprus involving bank deposits
Bloomberg in Madrid
European Union Economic and Monetary Affairs Commissioner Olli Rehn has emerged as the frontman for crisis-management policies driven by Berlin that are spreading economic pain as debt turmoil reignites.
Rehn faced a torrent of criticism and a call to resign after helping broker a rescue package from Cyprus that fell apart on March 19 over a demand to raid bank deposits. He has become the defender of German-inspired austerity that helped deepen the 17-nation euro region's recession.
Almost two years after Rehn announced the "beginning of the end" of the debt crisis, the euro area is headed for a back-to-back annual economic contraction for the first time. Now, Rehn has become a scapegoat as Germany and the International Monetary Fund let the commissioner take the rap for the Cyprus bailout that hangs in limbo, said an EU official who declined to be named.
"As soon as things go wrong, people start looking around for who to blame," said William White, former head of economic analysis at the Bank of International Settlements. "Everybody will be pointing the finger."
The conflict over a country that makes up 0.2 per cent of the euro zone's €8.6 trillion (HK$86.26 trillion) economy may jeopardise the gains that Rehn helped shepherd over the past three years of crisis fire fighting. In that period, the EU has set up two rescue funds, passed eight economic-governance laws, enacted a deficit-limitation treaty, and agreed to a "roadmap" for a better-run monetary union.
The challenge for Rehn over the Cypriot bailout comes on top of criticism of the austerity he has administered to other nations as a condition for receiving loans.
Nobel laureate Paul Krugman, who has called on European leaders to increase spending to boost growth, labelled Rehn's policy decisions "cockroach ideas" because they keep coming back no matter how hard you try to stamp them out.
"The amazing thing is the way men who know neither theory nor the history of previous crises are utterly convinced that they know what to do in our current crisis; and how their confidence in their prescriptions has been unaffected by the fact that they have been wrong about everything so far," Krugman wrote on his blog this month. "What's even more amazing is the fact that these men are actually running things."
In May 2010, the Greek government agreed to €30 billion of austerity as a condition of its first rescue package. Rehn, three months into his role as budget chief, forecast the Greek economy would contract 3 per cent that year and 0.5 per cent in 2011. The economy shrank by 4.9 per cent and 7.1 per cent as the budget-cutting programme crushed domestic demand. Last year, when Rehn forecast a 1.1 per cent expansion for Greece, output slumped 6.4 per cent, according to the commission's latest estimate published last month.
Krugman has "engaged in more of a zoological debate than an economic debate", Rehn told the Finnish newspaper Helsingen Sanomat this month. "It's been unclear to me where the money for the stimulus would have come from."
Rehn, who received a doctorate in international political economy from Oxford University, describes himself as a fan of the US counter-culture of the 1960s and traces a line from rock legend Neil Young to incoming Bank of England governor Mark Carney, having observed that "Canadians are cool."
He cited Carlo Bastasin's Saving Europe: How National Politics Nearly Destroyed the Euro as one of his favourite books of 2012.
"It's based on a very sound understanding of the economics and politics of the euro, and is well-researched," he said.
Now he's fighting those battles all over again, trying to bring together German Finance Minister Wolfgang Schäuble, whose government will face bailout-weary voters in September, and Cypriot officials who have seen their banking system hobbled by losses on Greek sovereign bonds.
European finance ministers said they had a deal with the International Monetary Fund and Cypriot President Nicos Anastasiades after negotiating through the night of March 15. Anastasiades agreed to impose a levy of 6.75 per cent on bank deposits of up to €100,000 and 9.9 per cent on amounts above that threshold in return for a €10 billion rescue package.
The deal began to unravel almost immediately with protesters on the streets of the Cypriot capital rejecting the deposit tax. Lawmakers killed it on March 19 and now officials are scrambling for a Plan B.