By Mark L Thomas
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Small island, big crisis

This article is over 9 years, 4 months old
At the time of writing it is still unclear whether Cyprus's banks will finally re-open. What has taken place on this small island state seems part of a by now familiar pattern of financial speculation, real estate boom and resulting collapse of a banking sector - one that had ballooned to around eight times the size of the economy it was attached to.
Issue 379

But two significant developments are important to note. Firstly, the decision by the Troika of the European Union, European Central Bank and the IMF to insist that bank depositors make a hefty contribution towards the cost of a bailout of the Cypriot economy is unprecedented.

And though the original plan to hit those with under 100,000 euros of savings with a 6.75 percent levy was eventually abandoned in favour of placing all the burden on wealthier depositors, the head of the group of eurozone finance ministers, Jeroen Dijsselbloem, declared that the model used in Cyprus might be used in future bank bailouts.

The assumption that bank deposits are a secure place to put money, something that has largely been true since the 1930s, no longer holds. This risks putting further pressure on fragile banks elsewhere in the eurozone.

Secondly, for the first time a eurozone country has imposed capital controls to restrict the flow of money out of the country. Fearing that once the banks do re-open, huge capital flight will swiftly result, the Cypriot government imposed “temporary” and severe restrictions on money transfers. The controls will last for seven days, but can be renewed as often as required. Iceland too introduced capital controls in 2008 as a temporary measure when its inflated banking sector collapsed. These measures remain in place.

The euro is a common currency shared by a group of countries. But a currency union with internal capital controls is a contradiction in terms. In effect, Cyprus has left the euro in all but name, at least for now. That a country that makes up just 0.2 percent of the overall eurozone economy could create such turmoil is a potent reminder that the crisis is far from over and there will be further convulsions to come.

The origins of the expansion of Cyprus banking sector lie in the collapse of Beirut as a financial centre in the early 1980s, followed by the collapse the Soviet Union in the early 1990s. In both cases, Cyprus benefitted from an inflow of funds. Joining the EU in 2004 and the euro in 2008) fed further financial expansion.

The strategy pursued by the Cypriot ruling class now stands in tatters. Marx described capitalism as a destructively dynamic force that constantly destroys old certainties as “all that is solid melts into air”. From Tunisia and Egypt in North Africa, to Syria in the Middle East, to Greece and now Cyprus on Europe’s southern fringe, the Mediterranean looks an increasingly unstable and uncertain zone for capitalism.

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