Business World

Wednesday 26 July 2017

Germany accused of dominating EU at expense of smaller states

Countries like Ireland must be free to develop as financial hubs, says Luxembourg

Andreas Rinke Berlin

LUXEMBOURG'S foreign minister has accused Germany of trying to dominate Europe and warned that small countries like Ireland must be free to develop as financial hubs, as the fall-out from the Cypriot bailout continues.

German political leaders are "striving for hegemony" in the eurozone by telling Cyprus what business model it should pursue, Luxembourg's Foreign Minister Jean Asselborn said.

In Berlin, Joachim Poss, deputy leader of the main opposition Social Democrats in the German parliament, said the EU must insist on reforms in other financial centres guilty of "tax dumping" in the eurozone. It is seen as a warning to countries like Luxembourg, Malta and Ireland.

"In the long term no business model can be tolerated in a market economy that circumvents fair competition. Of course, Luxembourg belongs to the group of problem countries," Mr Poss said.

Solidarity

But Luxembourg's Mr Asselborn said it was crucial smaller EU states are free to develop certain economic niches – including in financial services.

"It cannot be that Germany, France and Britain say we need financial centres in these three big countries and others must stop," he said.

That was against the internal market and European solidarity, and "striving for hegemony which is wrong and un-European," he said.

The comments come after a German insistence that wealthy depositors in Cyprus's banks be hit with losses to help fund the island's bailout looks set to do lasting damage to the country's importance as an offshore financial centre.

Like Cyprus and Ireland, Luxembourg is a small country but has a large financial sector.

Luxembourg's reputation for comparatively light-touch tax and regulation has long irked bigger neighbours Germany and France.

"Germany does not have the right to decide on the business model for other countries in the EU," Mr Asselborn said. "It must not be the case that under the cover of financially technical issues other countries are choked."

Cyprus faced bankruptcy and ejection from the eurozone without a rescue deal before a deal with international lenders was agreed in the early hours of Monday.

Criticism

It included a clause penalising large bank depositors that looks set to do lasting damage to the country's importance as an offshore financial centre.

Cypriot banks remained closed yesterday due to fears of a run on deposits and were not expected to re-open until tomorrow.

The crisis has revived criticism of Germany in much of southern Europe but criticism from Luxembourg is less common. It is a 'core' northern state and a founder member of both the European Union and the eurozone. Germany should also keep in mind it was a prime beneficiary of the eurozone crisis because its borrowing costs have plunged as nervous investors seek safe havens, Mr Asselborn added.

Meanwhile, ratings agency Fitch has put Cyprus on rating watch negative, saying the shock from the country's banking system could damage the domestic economy and public finances. The agency currently rates Cyprus B.

"The move reflects Fitch's opinion that the shock heightens the risk to public finances," the ratings giant said. (Reuters)

Irish Independent

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