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Graffiti is seen on the wall of a Laiki Bank, branch in Nicosia, Cyprus. (Simon Dawson/Bloomberg)
Graffiti is seen on the wall of a Laiki Bank, branch in Nicosia, Cyprus. (Simon Dawson/Bloomberg)

Globe editorial

Cyprus’s link to the euro is now tenuous Add to ...

The capital controls that are about to be imposed in Cyprus may amount to a temporary exit from the euro zone. The Cypriot euro will have a different value – a different purchasing power – from the euro itself. A currency is something that can flow freely through a defined area. Cut off from the euro zone, Cyprus will lack the euro.

The euro group – the committee of euro-zone finance ministers – did not intend this, but they have dealt with the whole Cypriot crisis with a spectacular lack of political sense, having for a few days insisted on partly expropriating smaller, insured bank deposits (less than €100,000) – not that Nicos Anastasiades, the President of Cyprus, has been a model of statesmanship either.

Indeed, there are already controls to prevent the outflow of capital, because the Cypriot banks are closed; when they reopen, the controls will stop large depositors from taking their money out of the country, especially from the Bank of Cyprus and the Laiki Bank, the country’s two largest. Already, one small chunk of the euro zone has been broken off.

The temporariness of the exit (by analogy to the possible “Grexit” of Greece, a Cyprexit?) invites questions. How long will the restructuring of the Cypriot banking system take, with the accompanying capital controls? Once the two currencies grow apart, it will be hard to bring them back into alignment.

Greece and Cyprus were never truly compatible with the developed economies of Western Europe, but it has turned out to be more trouble than it was worth for Greece to leave the euro zone. Cyprus, however, is on the verge of an institutional difference from the euro zone. In practice, it has already left, and the capital controls may be hard to shake off. The way back may be tricky.

 

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