Continental Commitment Issues

If you’d asked me a few days ago what my biggest worry about the global economy was, I wouldn’t have said Europe. It’s not that the situation there is good. It’s not, and it hasn’t been for years. But its trajectory at least seemed pretty clear: a year or two of recession followed by several more of slow growth, as Europe inched its way toward real fiscal and political union, which everyone agrees is a must in the long term if the euro zone is to remain intact.

But given what’s happened in Cyprus over the past few days, I find myself asking how committed Europe really is to that goal–and to the union itself. The Cypriot bailout, in which it was initially proposed that mom-and-pop depositors be left with a sizable chunk of the bill, has upset markets and renewed fears about whether the euro zone will survive in its current form. That matters not only because Europe is about a quarter of the global economy but also because the E.U. is perhaps the world’s most benign example of globalization. If it fails, that has big consequences.

The Flawed Cyprus deal says a lot about the forest-for-the-trees nature of the euro-zone crisis. It’s been clear for months that Cyprus, which has the disastrous public finances typical of southern European nations, would need a bailout in the neighborhood of €17 billion to avoid defaulting out of the euro zone. The troika of powers managing things in Europe–the E.U., the European Central Bank and the IMF–said they’d pony up only €10 billion, in good part because the Germans didn’t want to offer a larger loan when there was a decent chance that the Cypriots would default.

On the one hand, the Germans’ concerns are understandable. They feel they’ve done everything right, worked hard, liberalized their economy, kept debt and unemployment low–why should they support spendthrift southern European nations? But those feelings underscore the fundamental rifts in the euro zone that have always existed between the economically strong core countries like Germany and the weaker southern nations. And they also belie the fact that Germany, as an export powerhouse, has grown rich off the euro and has as much–and perhaps even more–to lose as any other nation from the disintegration of Europe. If Germany gets stuck with a stronger currency and weaker trading partners, it won’t be a pretty picture.

Could Cyprus Bring Down the European Economy? TIME Explains

The crisis in Cyprus also exposes a trust gap between local populations and elected officials in Europe that has been widening since the European crisis began. “The population is quickly losing confidence in the political order,” warns Mohamed El-Erian, CEO of PIMCO, the world’s largest bond trader, who is worried about the social-stability effect of the Cyprus mess. There’s a sense among Europeans that politicians are willing to hang them out to dry when things get tough. That’s not Europe-specific, of course. You could argue that the same thing happened in the U.S. after the financial crisis of 2008, when large banks were saved but homeowners didn’t get as much help as they might have early on.

The current Cypriot government was voted in because it promised to protect bank deposits. Even if small depositors end up safe–even if Cyprus doesn’t become the economic equivalent of the assassination of Austrian Archduke Ferdinand, which started World War I–the damage to trust has been done. As Julian Jessop, chief economist for Capital Economics in London, points out, “The economy of Cyprus is just 0.2% of the euro-zone total. If the E.U. is unwilling to cut a better deal for such a small economy at minimal cost, what chance is there for bigger ones?”

That may be the point. it’s quite possible that Cyprus is a warning shot by Germany for Spain and Italy or even France, making it clear that they’d better stay on the road to austerity because Germans aren’t about to keep bailing out weaker states. Their commitment to European unity has limits.

That matters, because the E.U. represents the best of globalization. And this brings up an even bigger question: Are we finally witnessing real pushback against globalization, the sort that has been widely (and thus far falsely) predicted since the financial crisis of 2008? If globalization is defined as the free movement of goods, people and capital around the world, we haven’t done badly when it comes to the first two. But the movement of capital has slowed. As a new report from the McKinsey Global Institute shows, cross-border capital flows are down precipitously from 2007, in large part because European banks simply aren’t lending across borders anymore. It’s a trust deficit that could eventually have consequences for us all–just as the assassination of an Austrian Archduke once did.