Colm McCarthy: Shocking treatment of Cyprus has exposed eurozone's inherent flaws
Bailout debacle was a designer cock-up eight months in the making
The Cypriot crisis provides two reasons to be jealous of those EU countries which chose to remain outside the eurozone. The first is that it was poorly designed, as is now acknowledged even by the designers. The second is that it has been managed in such an amateurish fashion. The shambolic handling of the Cypriot request for a bailout, first made last summer, is further evidence of mismanagement. This was not a poor decision made on the hoof under severe time pressure. This was a designer cock-up eight months in the making, and could readily have been avoided.
The essential design flaw in the eurozone is that it is not really a monetary union; it is just a common currency area, lacking the essential feature that ensures financial integration, namely a banking union. The latest piece of mismanagement over Cyprus makes the attainment of a banking union, on which progress has been negligible, even more difficult.
The Eurogroup decision on Cyprus, taken (yet again) at 3am on a Saturday morning, has rendered meaningless the repeated assertions that deposits in eurozone banks are guaranteed up to €100,000. The 'guarantee' has never been a joint eurozone undertaking, since it is the responsibility of each individual government, several of which are bust and would be unable to meet large claims. Unlike the deposit guarantee system in the United States, the eurozone countries collectively do not have an actual deposit guarantee fund in place, and the volume of deposits in many eurozone countries, not just those already in financial distress, is large relative to the fiscal capacity of the state. Bank runs by retail depositors are a serious risk, particularly in those countries whose governments lack financial credibility.