Thursday, March 28, 2013

Cyprus and the euro "exit debate"

Wolfgang Münchau believes that the EU's Cyprus policy has started the last act of the euro currency. It's a failed experiment. (Euro-Rettungskonzept: Danke, Dijsselbloem! Spiegel Online 27.03.2013)

He sees the current course, which he believes has ended the possibility of a banking union which would bring common oversight and eurozone-wide bank resolution powers and resources, as bringing on increasing capital controls (which are incompatible with a common currency) and a deep recession in countries under Germany's austerity hammer.

He credits Paul Krugman with beginning the "exit debate," apparently referring to his blog post Cyprus, Seriously 03/26/2013:

... Cyprus should leave the euro. Now.

The reason is straightforward: staying in the euro means an incredibly severe depression, which will last for many years while Cyprus tries to build a new export sector. Leaving the euro, and letting the new currency fall sharply, would greatly accelerate that rebuilding.

If you look at Cyprus's trade profile, you see just how much damage the country is about to sustain. This is a highly open economy with just two major exports, banking services and tourism — and one of them just disappeared. This would lead to a severe slump on its own. On top of that, the troika is demanding major new austerity, even though the country supposedly has rough primary (non-interest) budget balance. I wouldn’t be surprised to see a 20 percent fall in real GDP. [my emphasis]
And in What’s the Greek for Corralito? 03/28/2013, Krugman adds, "And let me ask again: what, exactly, is the point of remaining on the euro? The convenience and efficiency of a single currency is gone; meanwhile, the future for Cyprus on the euro is one of years of grinding deflation and catastrophic austerity. Is the hope of someday, somehow restoring the status quo ante enough to justify all of this?"

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