Cyprus: Last-Minute Bailout Doesn’t Address Eurozone’s Underlying Systemic Issues

A last-minute accord struck early Monday morning between Cypriot authorities and International Monetary Fund and European Union officials is being hailed in Brussels as a breakthrough. In reality, the agreement simply papers over serious structural fractures within the eurozone and is likely nothing more than a temporary solution to long-term problems.

The deal will tax deposits over €100,000 in the two largest Cypriot banks at a 30–40 percent rate—an unprecedented move to take money from depositors—in order to qualify for a €10 billion eurozone bailout. The deal will also break up the Cyprus Popular Bank, the second largest bank in Cyprus.

Cyprus Popular Bank depositors under €100,000 will be transferred to the Bank of Cyprus, the nation’s largest bank, in order to help shore up its balance sheet. The deal essentially creates a good bank and a bad bank.

Last Tuesday, the Cypriot parliament rejected an initial plan to raise capital by taxing all bank deposits, a plan that drew widespread public protest.

Despite the fact that the gross domestic product of Cyprus amounts to less than a half percent of that of the total eurozone, the impact of recent events will echo throughout Europe. Dutch Finance Minister Jeroen Dijsselbloem had to walk back his comments that the Cyprus bailout could become the template for future bailouts, comments that spooked investors in other eurozone countries.

The continued absorption of power into Brussels has undermined the economic competitiveness of countries within the eurozone, and countries themselves have been loath to rein in profligate spending, which has undermined their competitiveness. Cyprus is certainly no exception.

An economic crisis like the one facing Cyprus will continue to occur so long as the eurozone remains politically unaccountable and undemocratic. As Heritage’s Luke Coffey explains:

Europe needs to return to fundamental basics of democracy. Power needs to be brought back to the member states and to the people. The intrusive and excessive EU regulations need to be curtailed. The wasteful spending in Brussels needs to end. Economic policies of growth need to be pursued. The excessive borrowing and entitlement programs need to stop.

The future of Cyprus as a eurozone member remains in doubt, as two-thirds of Cypriots favor leaving the eurozone, and the implications of the bailout on future growth have yet to be seen. What is certain is that systemic fractures within the eurozone remain, and until they are addressed, the past week’s drama is likely to be just a warm-up act.