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This could potentially create further capital flight and deposit runs in the eurozone periphery, and a general feeling that the long-standing eurozone plan to try and remove tail risk from the euro had failed dramatically. There is no way that any member state leaving the euro is a good thing for the rest of the eurozone or the EU – even if that country is as small as Cyprus.
For Cyprus, leaving the euro would lead to a combination of separate monetary events. The first one would be a currency conversion and redenomination of domestic wages, prices and all other domestic monetary values into a new currency such as the Cyprus pound or any other currency, and the second, a change in the exchange value of the adopted currency.
In the case of Cyprus, these changes would lead to a significant devaluation. As it is widely acknowledged, the Cypriot economy is mainly driven by imports. A 50 per cent currency devaluation – which is the lowest devaluation percentage that one could expect – would mean that deposits, salaries and money in local currency would be ‘worth’ approximately 50 per cent less.
The cost of all imported goods including petrol, pharmaceuticals, clothing, etc would increase dramatically and become unaffordable as these primary goods have to be imported and paid with other currencies such as the dollar or euro.
Leaving the euro would also have negative implications for all aspects of the economy from savings and investment to property and consumption.
This would severely damage Cyprus’ economic and political credibility with EU countries, destroy trade relationships and block Cyprus from international markets for a long period of time.
For Cyprus to re-adopt the Cypriot pound or introduce a new national currency, this action would automatically act as the triggering point of Cyprus in effect leaving the European Union itself.
One could argue that Cyprus could potentially print its own currency and ‘seemingly benefit’ from a devaluation and immediate boost in competitiveness (especially in tourism). However, leaving the euro would be an expensive option.
Leaving the euro would also see Cyprus facing a number of serious legal disputes. Firstly, could a euro exit be consistent with existing EU Treaty obligations or would it inevitably require Cyprus to leave the EU as well with catastrophic consequences at a political and economic level
Another important consideration would be how other EU member states might respond, including the effectiveness of sanctions available and how the adoption of a new national currency would affect existing contracts denominated in euros, especially where these contracts are governed by the laws of other countries.
The eurozone would not be happy and would insist on some sort of repayment arrangement. Cyprus could, potentially, refuse to pay. But Cyprus is not Argentina. Its small size makes it vulnerable.
Thus, exiting the euro is not a wise option. Yes, heavy austerity and recession might be in place for the next few years. However, exiting from the EU would be a bigger blow for the Cypriot economy with catastrophic consequences and implications both in terms of geo-political and economic aspects.
There is currently no mechanism for a country to leave the eurozone. However, there is a provision (article 50 TEU) that allows for a negotiated exit from the EU. A much cited paper for the European Central Bank argued that this means that a euro and EU exit would need to take place simultaneously.
But as Open Europe noted last year – in the context of Greece – there may be another way.
Given the absence of a specific euro exit article, there are two broad ways in which a country conceivably could leave the Single Currency but stay in the EU, provided that the exit took place under reasonable amicable circumstances:
Changing the EU treaties to allow for a euro exit mechanism, perhaps modelled around article 50 or the idea – floated by German politicians – to automatically trigger an exit if a state is unwilling or unable to comply with the rules governing the single currency. This would require agreement amongst all 27 member states and would essentially be a treaty renegotiation (making it complex and long winded).
However, per definition, a decision for Cyprus to leave the euro has to happen essentially overnight (some estimates have put the real time available at 46 hours). This is problematic as a treaty change could take months. Even using the fastest track, it still requires unanimity amongst EU leaders and approval by at least some national parliaments.Therefore, a more likely option is to use existing articles in the treaties which provide flexibility to address a number of issues to legally facilitate withdrawal from the euro but not the EU.
Historically, political expediency has trumped EU law (to put it mildly) and in order to take a swift decision and avoid a Treaty change, EU leaders could (and most likely would) go for the latter option. Article 352 TFEU (sometimes referred to as “the flexibility clause”), in particular, allows member states to take measures to achieve EU “objectives” not yet provided for in the EU treaties.
Cyprus has now crossed the Rubicon of seizing large bank depositors’ funds, and it has crossed the Rubicon of putting in place capital controls, essentially prohibiting people from taking money out of the country (these airport signs prohibiting people from carrying more than 1,000 euros on an outgoing flight are only the most visible piece). So for practical purposes, Cypriots are not in the currency zone now.
In other words, many of the biggest benefits of being part of the Eurozone have evaporated for Cypriots. Euros stuck in Cyprus are not terribly useful for engaging in trade with the rest of Europe, or for protecting the small country against being buffeted by the waves of the global economy.
Meanwhile, the Cypriot economy is all but certain to enter depression in the months and possibly years ahead, as its government slashes spending and foreign investment dries up. But because it will remain on the euro (if a hobbled version of it), Cyprus will not have one of the pathways to recovery that other small countries that experience a financial collapse have at their disposal.
Normally, when a small country’s banking system collapses, so does its currency. No one would argue that this is a good thing: It means the country’s savers are wiped out and imported goods become much more expensive overnight. But it also sows the seeds of a recovery. If a currency falls by 40 percent, suddenly the country’s exports are 40 percent more competitive, tourism to the place is 40 percent cheaper, and anyone thinking of investing in the country can get labor for 40 percent less.
And those transition costs could be doozies. The current version of the bailout preserves deposits under 100,000 euros in Cypriot banks; if those euros were converted to a new Cypriot pound, they would surely plummet in value in anticipation of a run on the country’s currency. Everybody would suddenly be poorer.
The geopolitical risks for Cyprus are even bigger. It has spent the last couple of decades integrating itself with Europe. It’s bigger than just the currency: As a member of the EU, its citizens can travel, work, and relocate freely to any of 27 countries from Finland to Portugal (the question of whether a country that dropped the euro could remain in the EU is an unsettled one). The rest of Europe has plenty to lose if Cyprus dropping the euro created new pressure on Greece, Spain, or other troubled companies to make a similar move; it could again strain the continent’s financial resources and its politics to keep one of the world’s two most important currencies from unraveling entirely.
In other words, for Cyprus there are no great options remaining. The real lesson of its dilemma: If you’re a small country (or a large one, for that matter), don’t let your banking system get so large that it could bring down your entire economy in the first place.
The Financial crisis of Cyprus
Essential Requirements
Essay less than 5000 words (Strict)
Must CITE ALL SOURCES and use a BIBLIOGRAPHY
Must compare and contrast 2 models for your problem.
Must have an introduction section (with thesis), a body section, and conclusion section
Check Grammar and Spelling
Must attach the Cover Sheet to the front(will be available on Blackboard)
Sample Essay Structure
Introduction to Essay (keep it brief but include a thesis statement)
Model 1
Who are the actors (how many)? What are their preferences over OUTCOMES? What is the LIKELY outcome? Who wins? Who loses?
Model 2 (different model)
(roughly the same structure as Model 1)
Discussion
Which model better reflects reality? Which is simpler/clearer? Which is better for everyone?
so basically this is a group work and my part is to write introduction. I need Thesis statement in my introduction as well
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