Is Cyprus small enough?
- 22 March 2013
- From the section Business
The eurozone crisis isn't getting bigger, with events in Cyprus. It's getting smaller. But it is not getting simpler.
How small is too small to matter? It's a question that has come up quite a lot since the financial crisis in Europe began.
Greece (population: 11.3 million) was home to only 3% of the eurozone's people and an even smaller share of its GDP when it descended into crisis, at the end of 2009. And yet, for the rest of the eurozone it turned out to matter quite a lot.
Ireland (population 4.6 million) was even smaller. It accounted for barely 1.5% of the eurozone economy in the autumn of 2010. But still, for those few months, the future of the single currency seemed to turn on events in Dublin.
And now we have Cyprus (population 850,000). It has a smaller population than Naples - or Birmingham - and accounts for barely 0.2% of euro-land GDP.
If Naples imploded economically, even abandoned the euro, would it really matter all that much?
Asked that question, plenty of people in Northern Europe (Northern Italy, for that matter), would be tempted to say no.
Of course, they would feel sorry for the Neapolitans. Maybe send a cheque. But they'd find it pretty difficult to swallow the idea that the troubles of Naples could do serious damage to Europe as a whole.
Deep down, I suspect many feel much the same way about Cyprus.
They just cannot bring themselves to believe that it counts. Even though the assets of its financial system were eight times larger than the country's economy in 2011. And even though the orderly queues outside banks, and less orderly political negotiations, we have seen in Nicosia this week could end up with Cyprus being the first country to abandon the euro.
Of course, the comparison with Naples is a silly one. Naples is part of a sovereign country - Italy - which would, presumably, feel obliged to step in, long before the city ran out of money.
Tiny Cyprus has no central government to turn to for help. It only has itself, and the other members of the eurozone. And - maybe - the Russians.
The numbers involved in the bailout are tiny, too, from a European standpoint. A complete recapitalization of Cypriot banks is supposed to cost under 16bn euros. The battle over the deposit levy is about who will pay for 6bn euros of that. For reference, eurozone GDP last year was around 12 trillion euros.
Unfortunately for Cyprus, Germany has decided that final 6bn euros really does count. Even if Cyprus does not.
Chancellor Angela Merkel doesn't want the European Stability Mechanism to step in to recapitalise Cypriot banks, because she doesn't really want to sever the link between Europe's banking problems and its sovereign debt problems.
You might have been under the impression that the move to "banking union" was supposed to do just that. If so, you were mistaken.
For similar reasons, Germany doesn't want to suggest that bank deposits worth less than 100,000 euros are protected at the eurozone level, either.
You can understand Germany's position. Especially given how she feels about the Russians who have stashed their cash in Cyprus.
But this weekend, European negotiators - and Germany - may well have to decide whether they care enough about tiny Cyprus taking responsibility for its own banking problems to let it become not just the first Eurozone country to raid ordinary bank deposits, but also the first to leave the euro.