For German politicians with one eye on September’s elections, the Cyprus rescue is a good deal. For European Central Bank president Mario Draghi, desperately trying to keep the “irreversible” euro on the road, it’s a good deal. For the 800,000 Cypriots facing the obliteration of their nation’s economy in the decade ahead, it’s a nightmare.
The verdict of Finance Minister Michael Sarris was that Cyprus had avoided a “disastrous” exit from the eurozone. But after a few years of this “medicine”, Cypriots will be begging to differ.
Cyprus is about to embark on drastically painful surgery to shrink the size of its banking system as a share of its economy from seven times to around three times over the next five years, tapping €4.2bn from its richest depositors with savings over €100,000 to do so. Hammering savers makes little sense for the sake of the rest of the eurozone periphery, where those with deposits of more than €100,000 will be jittery.
But politicians in Germany are purring because they can go to the polls saying that they are not throwing taxpayers’ cash at a bailout of Cyprus’s offshore banking business and (alleged) Russian money launderers. For the Cypriots themselves, the devastated banking sector threatens a credit crunch which could double the nation’s unemployment rate of 14.7 per cent.
Capital controls passed by the parliament meanwhile put the nation in a surreal netherworld: it still uses the euro, but if people face severe limits on the amount of money they can move out of the country, it can’t be said to be part of a single market. It hardly encourages investors to pump in the funds the island will badly need in the coming years.