|Cyprus has stunned EU officials by ordering a vote in its parliament on the terms of the EU-IMF Troika bailout for the country, risking a rejection by angry lawmakers and a fresh eruption of the crisis.
Attorney general Petros Clerides said the assembly must have a say on the accord, which will inflict huge losses on depositors at Laika and Bank of Cyprus. The Orthodox Church of Cyprus expects to lose €100m, crippling its charities.
It is unclear whether the government can muster a majority as popular fury erupts. The Communists and Socialists have been vehement critics of the deal.
Green MP George Perdikis told the Cyprus Mail that he would vote against it to uphold the “freedom” of his country. “It is a crime to deliver Cyprus into the hands of the troika and allow it to become a colony.”
The Cypriot parliament threw out the original plan for a levy on guaranteed deposits below €100,000. A rejection of the final deal might exhaust patience in Berlin and Frankfurt. The country would be forced out of the euro within days if the European Central Bank cuts off support.
The pan-EU Socialist bloc in the European Parliament said the “neo-colonial” handling of Cyprus had been disgrace and called for the Troika to be disbanded, while the Liberal bloc demanded for a probe to find out who was responsible the “disastrous” decision to target small savers.
The latest twist came as Europe’s top policy-makers vowed to press ahead with their hard-line crisis strategy, brushing aside warnings of an economic debacle and ignoring a devastating challenge to key austerity claims.
In a defiant statement, an alliance of the ECB, Commission and Eurogroup said the “evidence is clear” that EMU crisis policies have been a success and recovery is in sight. “The eurozone has shown a degree of resilience and problem-solving capacity that many observers and policy makers would not have predicted even a year ago.”
The claims are flatly contradicted by the IMF, which warned this week that the eurozone remains “the epicentre of potential risk” in the world, and is endangering stability by dragging its feet on an EU banking union.
Steen Jacobsen from Saxo Bank accused EMU leaders of dangerous complacency. “Nothing they say is true. Reality has never been further away. It's scary,” he said. “We think the eurozone is in far worse shape than they realize. We will see contraction of 1pc this year but it could be as bad as 2pc."
Citigroup cut its forecasts drastically, warning that EMU will shrink both this year and next, with a quasi-slump dragging on until 2017.
It said Italy would contract 1.6pc in 2013 and 1.2pc in 2014, and eke out growth of just 0.2pc in 2015. By then public debt will have risen to 142pc of GDP. “Some form of debt restructuring via maturity extension or interest rate reduction may be likely over time,” said chief economist Willem Buiter.
The outlook is worse for Spain and worse yet for Portugal, which will see debt spiral out of control to 154pc by 2015. Mr Buiter warned that a haircut for private creditors “may be eventually required” despite the pledge of EU leaders that there would be no repeat of losses seen on sovereign bonds in Greece.
Europe’s policy elites are increasingly on the back foot after furious controversy this week over a Harvard paper widely cited as the intellectual justification for austerity.
The 2010 study by professors Carmen Reinhart and Kenneth Rogoff purported to show a cliff-edge fall in growth rates to -0.1pc once public debt reaches 90pc of GDP in rich countries.
An expose by the University of Massaschusetts found that there had been a basic Excel error and other slips. In fact growth falls slightly to 2.2pc. The effect is less serious on states that have their own currency and monetary instruments.
The International Monetary Fund has already warned eurozone leaders that the “fiscal multiplier” is much higher than originally thought in the EMU crisis countries, implying that austerity cuts have a much greater impact.
Greece, Portugal, Ireland, Spain, Italy and, most recently, France are all caught in a vicious circle where economic contraction erodes the tax base, causing them to miss deficits targets. They then have to cut deeper, fuelling a downward spiral.
The IMF said in its Global Financial Stability Report that the credit crunch in southern Europe is getting worse rather than better, and warned that a quarter of all bonds and debt issued by European companies is “unsustainable”.
“Firms in the euro area periphery have built a sizeable debt overhang during the credit boom, on the back of high profit expectations and easy credit conditions. The size of the debt overhang is particularly large in Italy, Portugal and Spain,” it said.