It’s time for the peripheral European countries—Greece, Spain, Portugal, Ireland, and now Cyprus—to push back. Only a unified threat to quit the euro might get the attention of Brussels and Berlin.However, based on comments by Cyprus leaders, Krugman's advice (as he well understands) is not likely to be followed.
What would happen if one or more countries actually reverted to their own currencies? Financial elites around the world say that would be catastrophic, but for Europe’s small nations, the catastrophe is now.
If Cyprus or Greece or Spain or Portugal (or better yet, all of them en bloc) decided to quit the euro and revert to drachmas and pesetas, they would need to block bank accounts, impose currency and capital controls, and default on some of all of their foreign debts, which would be re-denominated in the new local currency. There would be lawsuits up the gazork, but the IMF and ECB would have to step in to limit the broader damage even if they disapproved.
''An exit from the eurozone, which could also mean an exit from the European Union, would be disastrous both politically and economically,'' said Cypriot Finance Minister Michalis Sarris on Tuesday. ''It is a hypothesis we do not even wish to contemplate."
But as the global financial community responds to the realities of the Cyprus situation, some market analysts are saying that Cyprus will not have to "exit" the Eurozoneas it appears likely the Euro in many ways will simply evaporate from Cyprus.
"Cyprus is effectively no longer a full member of the eurozone," declared an analysis from Morgan Stanley on Wednesday morning.
As the Digital Journal reports:
The EU bailout deal ensures Cyprus remains a member of the eurozone, avoiding a disorderly default and return to the Cypriot pound. However, its banking sector has been decimated and its reputation as a safe refuge for foreign deposits destroyed. Capital flight will bolster and benefit banks in northern Europe, notably Luxembourg and Germany. The rift between northern EU members and the Mediterranean nations grows.And reporting from public protests in the capital of Nicosia on Tuesday, Reuters adds:
Cypriots face an uncertain future with inevitable job losses and business closures, while waiting to hear the terms of German dictated austerity they must now knuckle under.
As Cypriot banks remain closed and bank officials attempt to make sense of the restrictions which capital controls will place on funds when banks reopen, the flaws of a single eurozone currency are exposed.
"They've just got rid of all our dreams, everything we've worked for, everything we've achieved up until now, what our parents have achieved," said one student, named Thomas.
Outside the central bank, about 200 employees of the country's biggest commercial lender, the Bank of Cyprus, demanded the resignation of the central bank governor, Panicos Demetriades, chanting "Hands off Cyprus" and "Disgrace".
Dimos Dimosthenous, who has worked at the Bank of Cyprus for over 30 years, said: "The bank is being driven to closure.
"That will be the end. Our jobs, our rights, our welfare funds will be lost and Cyprus will be destroyed.