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In the European debt crisis, size matters

Bostjan Jazbec, newly elected governor of the Bank of Slovenia, gives a press conference on April 2, 2013. Slovenia's parliament appointed Jazbec as the new central bank governor on Tuesday amid speculation the eurozone country could follow Cyprus in needing a bailout.

The bailout of Cyprus continues to send ripples throughout Europe. Other small member countries have been left feeling vulnerable and wondering whether they have as much influence and power within the union as they thought.

Take Luxembourg -- the tiny country, wedged between Belgium, France, and Germany. Nobody is forecasting that Luxembourg is about to follow Cyprus into insolvency, but the Cypriot debacle has focused attention on the size of Luxembourg’s banking sector. 

"It is massive," says Raoul Ruparel of the Open Europe think tank. He says the banking sector is "22 times the size of the Luxembourg economy, much bigger proportionately than the financial sectors in Cyprus, Iceland or Ireland."

Luxembourg is believed to be harboring billions of euros from Germany. Ruparel says this is causing renewed irritation in Berlin; politicians and officials are asking whether a tax haven on this scale should be allowed to operate within the eurozone.

Plus, the Cypriot debacle has sent a chill wind through the small alpine state of Slovenia. Slovenian banks are in trouble. And government borrowing costs have rocketed in Slovenia. European officials say this country could be next in line for a bailout.

"We’re not as badly off as Italy, or Spain," says Saso Stanovnik, chief economist of the investment firm Alta Invest, "We are being punished for being small.”

The eurozone’s smallest country -- Malta -- feels even more beleaguered. This is another Mediterranean island laden with banks. But Maltese newspaper executive Anthony Manduca claims the comparison with Cyprus has been taken too far.

"We  are both small islands. We both have an important financial services sector," Manduca says. "But that’s where it ends. And I think it’s not fair to link the two together at all."

But all these mini-states are linked by the same fear. They are all -- to varying degrees -- afraid that investors will pull their money out and that the rest of the eurozone will then bully them into higher taxes and spending cuts  in return for help. That's because the European Central Bank has made it clear it can now use its unlimited resources to stop the eurozone collapsing.

That has made it -- theoretically -- possible for a small country to be ejected from the eurozone without the whole single currency unraveling.  That makes some of the member states dispensible. The small countries in the eurozone are now feeling much smaller.

About the author

Stephen Beard is the European bureau chief and provides daily coverage of Europe’s business and economic developments for the entire Marketplace portfolio.
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