Relief that a financial bailout for Cyprus was finally negotiated last week must be tempered by disquiet over how it was agreed, given the confusion, contradiction and recriminations that have since followed. The performance of Jeroen Dijsselbloem, the Dutch finance minister, and new inexperienced head of the eurogroup of finance ministers best exemplifes the confusion. He has managed to make a European drama out of a Cypriot crisis. First, he and the sixteen other eurogroup members wrongly accepted a proposal from the Cypriot president - later rejected by its parliament - to impose a levy on all the country's bank deposits, including insured deposits below €100,000 that are assumed to be protected under EU law. By accepting that Cyprus could repudiate its deposit insurance guarantee, the eurozone members were also signalling that insured deposits in other member states could now be at risk. The deposit guarantee has been devalued and public trust has been undermined. Despite reassurances by the EU and by governments, retail depositors in some euro area banks do have grounds for concern about the security of their savings.
Mr Dijsselbloem subsequently compounded his first error, in claiming Cyprus was a unique case, by later insisting the amended Cyprus solution - involving confiscation of bank deposits, but excluding insured deposits - was a template for resolving a banking crisis elsewhere in the euro area. Soon after his words were issued they were retracted, but not before the euro had fallen sharply in value and bank shares in the euro zone periphery were sold off heavily in reaction to his remarks. Some weeks ago, when the Dutch government nationalised a Dutch bank, SNS Reaal, Mr Dijsselbloem failed to apply the Cyprus solution. Instead, he opted to save depositors at the expense of taxpayers.
Mr Dijsselbloem's handling of the Cyprus bailout can only make it harder for banks in the periphery to attract and retain large corporate deposits, given the increased risk of bank runs. That can only add to the difficulties that banks in Spain, Italy, Portugal, Greece and indeed Ireland now face. Higher interest rates needed to attract such deposits can only mean tougher lending conditions for borrowers, which could damage the prospects for economic recovery at a critical time.
What is unclear is how the eurogroup of finance ministers from the seventeen member states in the single currency make policy, and how binding the public utterances of Mr Dijsselbloem are on his fellow eurogroup members. He has questioned whether the European Stability Mechanism (ESM) fund will ever be used to recapitalise banks directly. And his remarks echo those of German finance minister Wolfgang Schauble in an interview with The Irish Times. Nevertheless, the Government continues to insist that the deal agreed last June with heads of state and government - allowing for bank recapitalisation via the ESM - still stands. Unfortunately, there is less and less public evidence to support that claim.