Eurogroup demonstrates how not to calm fears about Cyprus

Jeroen Dijsselbloem nearly ruined everything.

Good news! Jeroen Dijsselbloem, chair of the group of eurozone finance ministers, nearly accidentally killed the euro yesterday.

In what Reuters blogger Felix Salmon described as a "formal, on-the-record joint interview" with Reuters and the FT, Dijsselbloem managed to suggest that the Cypriot bail-in was, in the words of Reuters' Luke Baker, "a new template for resolving eurozone banking problems".

Dijsselbloem said:

What we've done last night is what I call pushing back the risks… If there is a risk in a bank, our first question should be 'Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself?'. If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders.

The tenor of Dijsselbloem's comments certainly suggests he meant them to be generally applied. And, on paper, it's a good ranking of priorities: first you get the bank, which caused the problem, to claw back as much as it can, then you talk to the shareholders and bondholders, who have knowingly taken a risk on the bank's solvency, and then, you talk to depositors. Because depositors are, after all, just people who have loaned money to the bank in a different form; and if they're uninsured, they've always known there was a risk of losing a lot if they bank went under.

Unfortunately, this is precisely the sort of thing that you aren't supposed to say. Because the obvious outcome of explicitly stating that uninsured depositors are considered legitimate sources of funds for the recapitalization of their banks is that uninsured depositors start taking their money out of their banks, particularly in the other eurozone nations where the banks aren't yet out of trouble.

Bank runs are, generally, considered bad news. So it's somewhat unsurprising that shortly after Dijsselbloem's interview hit the press, he released a terse statement walking it back. You could smell the burning rubber from the speed of the u-turn; it reads, in full:

Cyprus is a specific case with exceptional challenges which required the bail-in measures we have agreed upon yesterday.

Macro-economic adjustment programmes are tailor-made to the situation of the country concerned and no models or templates are used.

It's hard to know quite what Dijsselbloem was thinking – although Paweł Morski presents an entertaining scenario of his own. But it becomes a bit clearer when you look at his background.

Dijsselbloem is the Netherlands' finance minister, a position he has only been in since 2012. His extraordinary position of power in the eurogroup comes from the standard rotating presidency, rather than any particular competency, and, although his electoral career goes back to 2000, his only other policy jobs have been the leader of a parliamentary inquiry on education reform in 2007 and a post at the agriculture ministry from 1996 to 2000.

The eurozone seems to alternate between the under-elected and the under-qualified, and it's not getting any better.

Jeroen Dijsselbloem, with Christine Lagarde and Olli Rehn. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Photo: Getty Images
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There are risks as well as opportunities ahead for George Osborne

The Chancellor is in a tight spot, but expect his political wiles to be on full display, says Spencer Thompson.

The most significant fiscal event of this parliament will take place in late November, when the Chancellor presents the spending review setting out his plans for funding government departments over the next four years. This week, across Whitehall and up and down the country, ministers, lobbyists, advocacy groups and town halls are busily finalising their pitches ahead of Friday’s deadline for submissions to the review

It is difficult to overstate the challenge faced by the Chancellor. Under his current spending forecast and planned protections for the NHS, schools, defence and international aid spending, other areas of government will need to be cut by 16.4 per cent in real terms between 2015/16 and 2019/20. Focusing on services spending outside of protected areas, the cumulative cut will reach 26.5 per cent. Despite this, the Chancellor nonetheless has significant room for manoeuvre.

Firstly, under plans unveiled at the budget, the government intends to expand capital investment significantly in both 2018-19 and 2019-20. Over the last parliament capital spending was cut by around a quarter, but between now and 2019-20 it will grow by almost 20 per cent. How this growth in spending should be distributed across departments and between investment projects should be at the heart of the spending review.

In a paper published on Monday, we highlighted three urgent priorities for any additional capital spending: re-balancing transport investment away from London and the greater South East towards the North of England, a £2bn per year boost in public spending on housebuilding, and £1bn of extra investment per year in energy efficiency improvements for fuel-poor households.

Secondly, despite the tough fiscal environment, the Chancellor has the scope to fund a range of areas of policy in dire need of extra resources. These include social care, where rising costs at a time of falling resources are set to generate a severe funding squeeze for local government, 16-19 education, where many 6th-form and FE colleges are at risk of great financial difficulty, and funding a guaranteed paid job for young people in long-term unemployment. Our paper suggests a range of options for how to put these and other areas of policy on a sustainable funding footing.

There is a political angle to this as well. The Conservatives are keen to be seen as a party representing all working people, as shown by the "blue-collar Conservatism" agenda. In addition, the spending review offers the Conservative party the opportunity to return to ‘Compassionate Conservatism’ as a going concern.  If they are truly serious about being seen in this light, this should be reflected in a social investment agenda pursued through the spending review that promotes employment and secures a future for public services outside the NHS and schools.

This will come at a cost, however. In our paper, we show how the Chancellor could fund our package of proposed policies without increasing the pain on other areas of government, while remaining consistent with the government’s fiscal rules that require him to reach a surplus on overall government borrowing by 2019-20. We do not agree that the Government needs to reach a surplus in that year. But given this target wont be scrapped ahead of the spending review, we suggest that he should target a slightly lower surplus in 2019/20 of £7bn, with the deficit the year before being £2bn higher. In addition, we propose several revenue-raising measures in line with recent government tax policy that together would unlock an additional £5bn of resource for government departments.

Make no mistake, this will be a tough settlement for government departments and for public services. But the Chancellor does have a range of options open as he plans the upcoming spending review. Expect his reputation as a highly political Chancellor to be on full display.

Spencer Thompson is economic analyst at IPPR