Parliament in Cyprus has made a grave mistake. Rejecting the conditions for an aid package from the eurozone and the International Monetary Fund (IMF) will have far-reaching consequences, not only for Cyprus itself, but also for the other 16 members of the euro currency area. The willingness to give the ailing banks and the nearly bankrupt state some 10 billion euros in emergency loans had been a generous offer by the EU and IMF.
But the parliament in Nicosia was under pressure from angry small savers, and subsequently followed an almost absurd logic. Yet, the bailout conditions were not about putting Cyprus under foreign rule, or imposing German interests. It was about keeping Cyprus afloat - the tiny state will be bankrupt by June.
The part that the Cypriots themselves would have had to contribute was some 5.8 billion euros and that was an appropriate share. That this amount was to be shouldered by bank clients and investors is an agreement by EU states, including Cyprus.
It is now obvious that the country, for years, has lived beyond its means. The business model to attract foreign capital with low taxes and lax controls on the banking sector went bust last summer. That is when the government in Cyprus asked for international help because the partly state-owned banks were in serious trouble. The national debt was threatening to spiral out of control - and that situation has not changed, despite what at first glance seems like a victory for angry bank customers.
If the eurozone wants to keep Cyprus in the currency union, there has to be urgent negotiations with Nicosia. There is time until June to find a solution when the country will issue it's next batch of government bonds. It is difficult to conceive that eurozone finance ministers over the weekend had such poor judgment about the reaction their offer would cause in Cyprus. Poor management and communication mistakes were made by the EU.
Note EU-Digest: there should be a referendum in Cyprus as to this country's desire to stay in the Eurozone or not. A stay in Eurozone vote should be coupled to strictly controlled austerity measures, including major changes in the lacks banking laws of Cyprus. If the vote goes against staying in the Eurozone - Cyprus must be left to solve their own problems including bankruptcy by June or earlier. There is no other simple solution.
Read more: Opinion: Time for Cyprus to leave eurozone | Europe | DW.DE | 20.03.2013
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