Euro has been compromised28 March 2013
So Cyprus has been bailed out, and it is the messiest so far. This time savers have been screwed. Given Cyprus's exposure to Greece's problems it is perhaps not too much of a surprise, but this is a major knock for the region as whole just when it was starting to settle down. However this particular case has been a right fuck-up.
Principles betrayedThe big problem with the whole affair is that it has caused major structural damage to Europe as a whole. The mere proposal to default on the €100,000 deposit guarantee has meant that the idea that money is safest in a bank is a fiction, and having to do such a back-track will come back to haunt both the Euro and the EU. The current proposal is pretty much an attempt to make a bank collapse orderly, but some of the measures strike at the heart of the common market. Never mind causing cracks on the Euro project, the idea of free movement is one of the (if not the) central planks of the whole European Union.
Whenever politicians talk of "temporary" and "special" circumstances, the usual rule of thumb is that they are either deluded or lying, so this is a no-going-back moment. Any sane person is going to get their money out of Cyprus the very moment capital controls go, and disallowing this is an admission that the idea of the Euro being a common currency is actually a charade. By disallowing capital flight within the Euro, all that is happening is the brewing of a capital flight from the Euro as a whole.
Business stifledMore immediately, even though allowances for businesses are higher, the scrutiny needed for transactions above €5,000 will be a business's worst nightmare. Being able to distinguish between a bona-fide business transaction and an attempt to get private money out via the back door is actually non-trivial, particularly as civil servants are notoriously bad the world over at making commercial decisions. In practice businesses will be landed with at least extra paperwork costs, and they can forget about having any more overseas credit lines. This is all before considering whether the business concerned, much like University of Cyprus, has had all its funds blown away by having them in the wrong bank.
End of the Euro?I'm not convinced of this as for many countries the costs of leaving outweigh the cost for staying, but I think the chances of break-aways is significantly increased. Leaving the Euro only make sense for countries who intend to default on everything, but despite what the Cryriot president claims, Cyprus looks like a country that might well end up in this stage before long.
My feeling is that this year could be the end of the Euro's high point, and given how much the Euro is a logical conclusion of the EU common market project, such an eventuality may well be the beginning of the end of the whole EU if it is mishandled. This is not guaranteed, but a lot of people out there will be hammering at the cracks. The problem is that the precedent for the EU collapsing is the League of Nations in the 1930s.