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Continental Drift: Cyprus and the Politics of Economic Union

News & Features | April 9, 2013

If you were unable to locate Cyprus on the map, you would be forgiven. It is an island nation in the Mediterranean wedged between Greece and Syria with a landmass less than that of Vermont. Cyprus has a population of less than a million and its GDP makes up less than one quarter of one percent of that of the entire Eurozone. Nevertheless, Cyprus and its crumbling economy have been making headlines for the past month.

The Cypriot economy is in shambles; an initial plan formulated between the government of Cyprus and the European Union (EU), to impose a one-time tax on all accounts in Cyprus banks, has been voted down. The most recent proposal by the Cypriot government involves a similar tax imposed only on those accounts exceeding 100,000 euro (roughly $130,000), and has (predictably) caused a measure of unrest. Protests have formed before the doors of national banks. Wealthy Russian depositors make up a large percentage of foreign investments in Cypriot banks, but a plea made to the Russian government for a more generous policy has fallen on deaf ears.

This is a watershed moment in Cypriot history, after which the country will either begin the long road to economic recovery, or, in the absence of aid from the International Monetary Fund and its sibling-states of the Eurozone, will find itself plunged into a deeper economic ruin—perhaps irreversibly.

The fate of the Cypriot economy, while perhaps provincially important and riveting in a theatrical sense, does not seem to be a matter of global importance. So why have the eyes of the world been fixed upon the fate of this small island nation since the beginning?

Cyprus is only the most recent in a string of sovereign nations relying upon the IMF and Eurozone neighbors for support in the wake of the global subprime mortgage crisis. Cyprus’s most immediate neighbor, Greece, has been in infamously dire straits since 2010; the nation has received two major bailout loans from both the IMF and individual creditor-nations in the EU and is now subject to strict austerity measures. Spain received a €100 billion “bank recapitalization” package last year through the combined efforts of the European Commission, the European Central Bank, and the IMF.  The struggling country is now being considered for another loan. Together the IMF and the EU have given €78 billion to Portugal and €67 billion to Ireland in bailout cash.

These drastic financial measures have been crucial to maintaining the integrity of the Eurozone. The legitimacy of the euro rests upon the binding nature of a nation’s decision to adopt the single currency. If the euro were to fail anywhere, there would be devastating monetary consequences across the rest of Europe. It follows that each nation in the Eurozone has a vested interest in keeping their partner nations afloat fiscally. Indeed, it is this spirit of international cooperation that led to the adoption of the euro and the formation of the EU in the first place.

Weigh this temperament of collaboration against the self-protective interests of the individual states of the EU. The nearly half a trillion euros combined for these bailout efforts have come directly out of the pockets of the more wealthy nations of the Eurozone, like Germany and the Netherlands. So-called “peripheral” nations of the Eurozone have generally been hit hardest during the global recession. These struggling countries have started to chafe at the economic restrictions levied upon them by creditor nations. The Cypriot foreign minister Loannis Kasoulides, stated that the engineers of the EU bailout were aiming for nothing less than the brutal destruction of [the Cypriot] economic model.”

This dissatisfaction is not unique to Cyprus, however. Faith in the European Union is at an all-time low across the continent. In 2007, a poll conducted by TNS Opinion and Social for the European Commission showed that over 50% of European citizens surveyed had a positive image of the European Union. That number is down to 31% as of May 2012. That same poll found that the majority of respondents no longer believed the EU satisfactorily addressed the interests of their own countries.

These continent-wide metrics find themselves manifested in local political landscapes. The extremely right-wing Golden Dawn party in Greece gained entry to the Hellenic Parliament for the first time in 2012 on a Eurosceptic platform. A similarly Eurosceptic party was founded this March in Germany.  France and the United Kingdom, two countries with historically skeptical attitudes toward the EU, are seeing these outlooks redoubled in local elections. Poverty protests have broken out in Bulgaria. Hungary amended its constitution this month, in direct opposition to the wishes of the European Commission.

All this to say that the EU is currently experiencing a crisis of legitimacy. International tensions have risen and simmered, tending along lines of credit, default and bailout. After the multitude of crises last year (Greek, Spanish, Portuguese, et al.), however, the Eurozone seemed to be holding itself together with a relative degree of stability. Cyprus, for its size, and its miniature GDP, might have provided the EU with an easy economic victory. After three years on the default crisis battlefront, the EU had an opportunity in Cyprus to demonstrate that it was in control.  Instead the Cypriot economy has turned into, a debacle, complete with bank runs and cash-only service.

Last month at a demonstration outside the Cypriot parliament, one protestor held a sign that read “Fuck Europe.” He was protesting the EU’s unpopular bailout plan for Cyprus, but he might have been speaking for the whole continent.