More specifically, it is about the euro, the common currency of 17 nations including Cyprus.
That the crisis has hit Cypriots hard is undeniable. Jobs have been destroyed. Currency is scarce. There are limits on how much money individuals can take from their bank accounts (if these bank accounts still exist). There are limits on how much capital can be taken from the country.
In effect, two classes of euros have been created: Those able to circulate freely and those confined to Cyprus.
The thinking of European leaders seems to be that if Cyprus can be walled off, the rest of the eurozone will be safe.
And perhaps it will — for a while.
But events in Cyprus have again underscored the fragility of the entire common currency adventure.
Introduced to the world in 1999, the euro was an elite project aimed at lowering business costs and encouraging trade. It quickly became one of the world’s major currencies. In terms of its importance to the global trading economy, it now rivals the U.S. dollar
Yet with few exceptions, European voters were never asked if they wished to abandon national currencies in favour of the euro.
If the question had been put to a vote, many countries — including almost certainly Germany — would never have signed on.
Even in 1999, the weaknesses of the euro were well known. A common currency serving widely disparate regional economies can work only if the inhabitants of those regions are willing to let one central government set the rules.
Canada’s dollar is a common currency of that sort. Ottawa sets the rules and the provinces accept that fact. Even so, there are problems. The dollar trades now at a level that works well for the Alberta oil industry. But that level is too high for Ontario manufacturers hoping to export.
Yet Canada’s currency difficulties pale beside those of the euro. The Spanish economy is nothing like, say, Germany’s. However, neither Spain nor Germany — nor any other country — is willing to cede political authority to a central authority.
True, euro zone elites are trying to persuade member nations to adopt common, austere, German-style tax and spending policies. But voters in Italy, Greece, Spain, Portugal and now Cyprus are resisting.
In short, with the economics and politics of the euro at odds with one another, the common currency has become more curse than blessing.
Compare, for instance, the Cypriot banking crisis with the 2008 financial meltdown in Iceland.
Like Cyprus, Iceland is a small island country. Like Cyprus it deliberately set out in the ’90s to become a super-sized, international banking centre.
In fact, with liabilities 10 times bigger than the country’s entire economy, the Icelandic financial sector was even more bloated than that of Cyprus.
In the end, Iceland, like Cyprus, wasn’t strong enough to survive the meltdown. Icelandic banks were victims of dodgy U.S. mortgages. Cypriot banks took their hit when the Greek government bonds they held were suddenly and dramatically devalued
Like Cyprus, Iceland let banks collapse, imposed strict capital controls and refused to guarantee the savings of large foreign depositors.
Government spending was cut and taxes raised.
But unlike Cyprus, Iceland had its own currency, the krona. By allowing that currency to devalue by an astonishing 50 per cent, Iceland managed to make its exports competitive and kick-start economic growth.
More to the point, the krona kept the Icelandic crisis — with some exceptions — contained to Iceland.
Europe’s leaders pray the Cypriot crisis will be similarly contained. If Cyprus didn’t use the same currency as Italy, Spain, France and 13 other nations, this prayer might well be answered. But Cyprus does use the euro. Its problems are Europe’s problems. Europe’s problems are the world’s.
Original Article
Source: thestar.com
Author: Thomas Walkom
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