In some areas, the handling of this small disaster sets worrying new precedents for the entire bloc; in others it confirms the hold of some very regressive thinking
There was no run on the banks as they reopened in Cyprus, a vacuum that some reporters were left bravely trying to fill for their rolling-news channels. But to focus on Limassol's queues (or lack thereof) would be a mistake. The policies imposed on Nicosia over the past fortnight will have larger consequences beyond a few patient customers. In some areas, the handling of this small disaster (Cyprus is worth a mere 0.2% of eurozone GDP) sets worrying new precedents for the entire bloc; in others it confirms the hold of some very regressive thinking.
Of the precedents, the most striking must be the introduction of capital controls. At Larnaca airport signs have gone up notifying passengers that they cannot take more than €1,000 (£845) out of the country. Bags are reportedly being searched, too. Bank customers cannot withdraw more than €300 on any day. The cashing of cheques is prohibited by the central bank. In a 17-nation monetary bloc, one of whose main purposes is to facilitate the free flow of capital, this is an astonishing new phenomenon. There is a very good reason why Greece, Ireland, Portugal and Spain did not succumb to such policy temptations, despite the distress at their financial institutions: it renders Cyprus less than a full member of the single currency. Savers can put their money in any of the 16 other euro nations and suffer no such restrictions; so why would they stick their euros in a bank in Limassol, rather than Lyons or Leiden? To all intents and purposes, a euro in Cyprus is now worth less than one in Belgium. Finance minister Michalis Sarris may claim that "we are talking about a matter of weeks", but Iceland brought in capital controls in 2008; five years later, it still has them.
In principle, there's nothing wrong with restricting the flow of hot money, despite what the IMF used to say. Limits on withdrawals were surely why there was no stampede on Cypriot banks yesterday. Indeed, it's a shame that the island did not apply them years ago to limit the foreign funds pouring in. But to introduce them now, within a monetary union, is to tear a hole in its very fabric. Imagine if banks in Middlesbrough were no longer honouring cheques or withdrawal slips, even though their counterparts across the UK were still doing so. In the first instance, that would hasten the end of banks in Middlesbrough; in the second, it would undermine the credibility of the UK financial system, and raise questions about why the Bank of England could not support one of its larger towns.
Couple that innovation with the notion that bank depositors now have their money at risk, for arguably the first time since Lehmans fell over. When EU officials let slip that the Cyprus "bail-in" is the template for future sovereign crises, what they mean is that taxpayers should no longer have to pay for bankers' losses. This may have been cheered by some on the free-market right. But it neither describes what has happened in Cyprus, which is still taking a €10bn loan from European taxpayers, nor does it seem much of a principle if applied to half a Mediterranean island. The Troika would hardly gamble this way if a giant like Madrid came under renewed fire. On the other hand, one would hate to be a small saver in a peripheral euro nation at the moment. Pensioners of Slovenia, our thoughts are with you.
Then again, the euro club has made rather an unappealing habit of bullying the weak nations and protecting the strong over this crisis. It is impossible to believe that any big country, no matter how distressed, would be subject to a grab on the insured bank deposits of its people, such as was proposed in Cyprus last week. Which leads to the fourth and final depressing conclusion: the euro area clings on to brutal austerity as its crisis-fighting tool of choice – despite all the evidence that it simply doesn't work. "We saved the banks but are running the risk of losing a generation," said the president of the European parliament this month. The same could be said of the entire euro: the project trundles on, but a lot of people have been cast overboard.
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