It was a humiliating day for Cyprus and a profoundly worrying one for the future of the single currency. The nation – at least for a week – is no longer in the euro.
Nicosia is now a city of burly security guards checking through suitcases for cash, bans on cashing in cheques and limits on transfers of money abroad. The draconian capital controls may prevent a bank run – for now – but it leaves one of the founding principles of the European Union in tatters. You no longer have the right to put your money where you want to.
The EU was meant to create a single economic cluster, cemented by the single currency and based on the tenets of labour and capital mobility. The movement of labour has always been limited by barriers such as language, but at least money could move around to find its most efficient home – until now.
And will these controls really last just a week? The experience of Iceland, another nation crippled by a bloated banking system, suggests not. In November 2008, it put them in place for three months. Now it has extended them indefinitely. At least the collapse in value of the Icelandic krona helped put the economy back on its feet far more quickly than everybody expected.
But Cyprus is locked into its euro prison. In practice, not being able to get money out means nobody will put it in. So the country, already crippled by its exposure to Greece’s banks, must begin its attempts to rebuild and shrink its banks with the handbrake on because outsiders are unwilling to invest.
Meanwhile the country remains a worrying sore on the single currency bloc, and one vastly out of proportion to the minuscule 0.2 per cent of the eurozone’s economy it represents. In Spain, Italy, Greece and Portugal the benchmark cost of borrowing for 10 years rose sharply yesterday as investors pondered the unprecedented move and wondered if it could happen elsewhere. If Cyprus has a future, it is surely outside the euro.