Good Work, Eurozone
It's Austerity That's Causing Chaos in Cyprus
In the forthcoming AEI Economic Outlook, John Makin has some tough comments on the EU handling of the Cyprus crisis. Yes, the Russians are to blame too … but the foremost culprit is the EU's failing austerity policy.
The EU-IMF willingness to provide hundreds of billions of euros during 2010-12 to bail out Greece while denying Cyprus €10 billion to rescue it two banks is, beyond being bizarre, ironic for at least two reasons. First, the EU-IMF provision of financial life support for Greece has been a spectacular failure, with the economy and the stock market in a state of collapse, engendering near anarchy for beleaguered Greek citizens. Secondly, the Greek collapse caused the insolvency of Cypriot banks that had invested heavily in Greece, especially after Cyprus joined the European Monetary Union (EMU) in January 2008.
Cyprus is a victim of the EU-IMF unsuccessful rescue effort in Greece that gave it loans in exchange for austerity – more taxes and less spending. So harsh was the austerity imposed upon Greece as a condition for bailouts that output and tax revenues have collapsed, leaving Greece’s debt-to-GDP ratio even higher than it was before the Greek crisis erupted in 2010 after the late 2009 revelations that the Greek government had been faking the numbers on its deficits and debt.