March 29, 2013
Cyprus As A Eurofailing
Posted by David Zaring

The resolution of the Cyprus crisis - no bailout, resolution of one bank, huge losses for depositors aboved the insured amount, and capital controls - has been received pretty well by banking types, who think that bailouts lead to moral hazard.  Well, except for the capital controls bit (Cypriot euros don't really seem like euros if you can't remove them from Cyprus).  But others aren't so sure, and Peter Lindseth has a nice post why up on the EuropeUS blog.  It's an interesting blog, if you're interested in Europe, so give it a look:

The situation in the EMU today reflects the perversely ‘partial’ character of banking integration in the Eurozone.  I say ‘partial’ because Eurozone banks have apparently been well ‘Europeanized’ in terms of deposits and lending (very much consistent with the single market aspiration) but apparently not much else that is necessary to make such a single banking market a durable functioning reality. Despite the conveniently exculpatory critiques from the likes of Angela Merkel that the problem was the ‘Cyprus business model’, that model is arguably different only in magnitude but not in kind from what prevails in many other member states. As Gavyn Davies nicely put it in the FT, Cyprus is simply a ‘microcosm of the entire eurozone crisis, if a microcosm on steroids’: ‘an over-leveraged banking system, with insufficient capital and reliance on foreign funding,” all of which “is familiar territory in the Eurozone’.

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