The EU and member governments were aware that an unsustainable situation was developing in Cyprus. Ollie Rehn, the EU’s top economics official, approached Cypriot President Christofias in November 2011 to sound out the Cypriot government on a possible bailout (FT Spiegel, Hope, Peel, 22nd March 2013).
It is said that Angela Merkel regarded the Cyprus situation as number one issue in the EU back in 2012 but without the co-operation of the Cypriot government there was little that the EU could do to force the situation.
Commison and member state levels of exasperation with Cyprus were already high. Cyprus had only been accepted into the EU at the insistence of Greece, which had threatened to veto all other accessions until Cyprus was a member.
See for example Jeffrey Stacey, ex-US State Department, argues that a more probable explanation of the harshness of the bailout lies in 'the bitterness Northern European political elites still nurse from the early 2000s, when Greece blackmailed the EU into bringing Cyprus into the club' (see SpeigelOnline 3 April 2013).
EU officials and member states believed that Cyprus’s accession would lead to a positive approach from the Republic to the peace proposals under the Annan Plan. But no sooner was Cyprus in the EU than the government recommended rejection, rightly or wrongly, of the plan in a referendum. Apparently EU officials were livid about this and felt that they had ben taken for a ride (see FT Rachman March 18th 2013).
On the feelings left around Europe after the rejection of the Annan Plan see also Ker-Lindsay, J. Faustmann, H. and Mullen, F., 2011 An Island in Europe: The EU and the Transformation of Cyprus p.4
Many felt personally aggrieved at the result. After having worked for many years to ensure that the island's accession would not be held hostage to Turkey's refusal to reach an equitable settlement, there was a deep sense of frustration and betrayal at the way the Greek Cypriots had rejected what many saw as a workable and viable solution.
The above authors go on to argue that accession did not have the impacts in terms of competitiveness and reform that some had hoped for.
In this sense, accession, although leading to profound transformations, nevertheless did not requre or result in the sort of changes that many had felt would be most beneficial to the island (p.8).
In a chapter on the social impacts of accession to the EU Iannou and Kentas 'Social Effects of Membership' (above) argue that accession for Cyprus was instrumental and determined by a single issue: its desire to improve its negotiating position vis a vis Turkey.
The authors argue that this led to a cognitive deficit with regard to Cyprus's Europeanisation. There was little debate about accession and when there was it tended to focus on the 'Cyprus issue'. And while Cyprus has been speedy to adapt to the technical requirements of the EU at a cognitive level it is has been lagging in the speed of its social transformation.
So for example, with regard to gender relations the authors argue that although there have been important legal and technical changes this has not thus far profoundly challenged 'strongly embedded role identities' that favour traditional patriarchal attitudes and practices that allow hidden discrimination to continue. The authors call for 'a total grassroots cognitive shift' with regard to contemporary gender relations p.90-1 and 100.
Cyprus’s continued propensity to support Russian foreign policy initiatives at the UN did not help (see votes over Kosovo and the break–up of Georgia FT Barber 22nd March 2013). Concerns over money laundering and Cyprus’s tax haven reputation were also growing, a situation not helped by the way in which Cyprus’s Laiki bank (see FT Hope 22nd March 2013) had provided a conduit for Slobodan Milosevic’s money in defiance of UN sanctions.
So from the EU side of the equation the Cypriot request for a bailout came on the back of growing frustration with Cyprus and the delight that President
Christofias seemed to show in thumbing his nose at the European project whilst taking what structural funds were on offer (see below).
The elections held in early 2013 were almost entirely focused on the issue of the bailout.
Once Anastasiades had won the elections comfortably the EU/IMF/ECB were determined to move quickly and forcefully to bring the simmering issue of the bailout to a conclusion. However, as we shall see, they no longer spoke with one voice.
Growing clamour for clampdown on tax evasion
There has also been growing frustration with tax evasion post-2008 as state coffers have been called on to provide more welfare goods at a time of falling tax revenues.This could be seen in increasing US and EU pressure on Swiss banks, stepped-up US procedures in the new Foreign Account Tax Compliance Act to chase its citizens, whether living in the USA or not, for a first tax take of their incomes through its unique unitary tax system, and growing pressures from grassroots campaigns against corporate tax avoidance in the UK such as UK Uncut that pulled big US corporations Starbucks and Amazon into the front page news.
This growing war on tax evasion was formalised at the EC Finance Ministers' meeting in Dublin in April 2013 where,
Five of the EU’s biggest states agreed this week to deepen co-operation to root out tax evasion – with Britain, France, Germany, Italy and Spain saying they would share more information about financial transactions (FT Chaffin 12 April 2013).
It is fair to say that this growing clamour for tax clampdowns focussed increasing attention on Cyprus and its reputation as a tax haven. The fact that large flows of Russian funds were moving in and out of Cyprus was coupled with a widespread belief that a considerable part of this money was being laundered despite Cyprus's adherence to anti-money laundering.
The fact that one of the conditions of the agreed provisional Memorandum of Understanding between the EC and the Cyprus focussed on a thorough-going audit of the island's anti-money laundering procedures and their application speaks to this unease in EU member states.
The recent French scandal in which Jérome Cahuzac, a junior finance minister, was forced to resign after lying for months about the existence of a secret Swiss bank account of his containing €600,000 has given added impetus to anti-tax evasion moves (see FT Spiegel 13 April 2013).
For more on the who-said-what of the negotiations of the Cypurs bailout/in
See the excellent Brussels Blog piece by Peter Spiegel on who said what at the 15th March EuroFin meeting. See also the piece by Nathan Morely for the Cyprus Mail 12 May 2013 where a senior EU official gives an insider view of the bailout positions and negotiations.