BERLIN (Reuters) - Luxembourg's foreign minister accused Germany on Tuesday of "striving for hegemony" in the euro zone by telling Cyprus what business model it should pursue.
Like Cyprus, Luxembourg has a large financial sector, whose comparatively light-touch tax and regulatory regime has long irked its much bigger neighbours Germany and France.
Germany, the European Union's biggest and most powerful economy, had insisted that wealthy depositors in Cyprus's banks contribute to the island's bailout and said the crisis has killed a "business model" based on low taxes and attracting large foreign deposits.
"Germany does not have the right to decide on the business model for other countries in the EU," Foreign Minister Jean Asselborn told Reuters. "It must not be the case that under the cover of financially technical issues other countries are choked."
"It cannot be that Germany, France and Britain say 'we need financial centres in these three big countries and others must stop'."
That was against the internal market and European solidarity, and "striving for hegemony which is wrong and un-European," he said.
Cyprus had faced bankruptcy and possible ejection from the euro zone without a rescue deal with international lenders that was finally sealed in the early hours of Monday and included a clause penalising large bank depositors.
Cypriot banks remained closed on Tuesday due to fears of a run on deposits and were not expected to reopen until Thursday.
The Cyprus crisis has revived criticism of Germany in parts of the euro zone, especially the austerity-battered south where voters and commentators have long complained of what they see as Berlin's domineering attitude and insensitivity to their pain.
But criticism from core northern states such as Luxembourg - a founder member of the EU and euro zone - is less common.
Asselborn said it was crucial that smaller EU states in particular were allowed to develop certain economic niches.
Germany should also keep in mind it was a prime beneficiary of the euro zone crisis because its borrowing costs have plunged as nervous investors seek safe havens, Asselborn added.
The tough stance on the banking and taxation policies of countries such as Cyprus crosses Germany's political divide.
On Tuesday, Joachim Poss, deputy leader of the main opposition Social Democrats in parliament, said the EU must insist on reforms in other financial centres guilty of "tax dumping" in the euro zone such as Luxembourg, Malta and Ireland.
Responding to Asselborn's comments, Poss said: "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."
German politicians have stepped up their attacks on tax evasion ahead of federal elections in September.
(Writing by Gareth Jones; Editing by John Stonestreet)