"Instead of solidarity from our European partners we have been served poison"

[koganbot]

It's out of the U.S. headlines, but news from Cyprus keeps getting worse.

Cyprus forced to find extra €6bn for bailout

This is all a stratosphere beyond my understanding, but is there any reason whatsoever for Cyprus to stay in the eurozone?* All the banking disruption that such a move would precipitate has already happened anyway. If the country exits, it can devalue its currency and at least maybe become a real cheap destination for tourists. At least that's a theory. Otherwise, where does its economy come from? The equivalent "devaluation," if Cyprus stays in the eurozone, will be through major unemployment, and drops in wages too. Right?

By the way, if you're curious, last month I was updating my previous Cyprus thread whenever I noticed a new idea or analysis. Not that the analyses are mine. I provided links.

Meanwhile, warning flares are shining in the sky above Portugal.

*By "eurozone" I don't mean the European Union, rather just the members whose currency is the euro.

Comments

[koganbot]

OK, here's a Reuters article by Hugo Dixon giving reasons why Cyprus shouldn't leave the eurozone: they'd lose the bailout, the value of the Cypriot pound would plummet,* cost of immigrant labor would rise offsetting the advantages of the devaluation, cost of imports would rise, the government would default on its debts, it would either have to have a policy of austerity that's even worse than that demanded by the troika, or it would get hyperinflation.

Krugman last month said that Cyprus should leave the eurozone now, fast. He also said it wasn't going to happen, at least not right away. Presumably he hasn't changed his mind, and thinks that not all those terrible things that Dixon worries about would happen, and that more horrible unemployment and wage destruction will happen by staying with the euro, with no way out, tied to the troika's enforced austerity policies.

*But isn't that exactly what one would want, for Cyprus's currency to plummet?

[koganbot]

Tim Duy ("When Can We All Admit the Euro Is an Economic Failure?"):

With no depreciation for crisis-stricken economies, no fiscal stimulus, and tight credit conditions through half of Europe as banking consolidates within national boundaries, what exactly is the road forward for Europe? I just don't see it.

Cyprus already faces all of the above

[koganbot]

Laurence Knight at the BBC Website ("Cyprus's future: Is euro membership viable?"):

Cyprus does, of course, have some say over its destiny - it could still choose the nuclear option of leaving the euro.

Any expectation that Cyprus would leave would result in bank runs, capital controls and huge losses for depositors. Who wants their deposits forcibly converted into a new Cypriot currency and then devalued?

But, given that Cyprus already faces all the above, some economists are asking why not just go ahead and leave?

At least that way it can enjoy the benefits of devaluing and of regaining a central bank that is able to finance the government directly.

(The link in the middle there is to Krugman.)

[koganbot]

Another wrinkle: the Cyprus bail-out/bail-in deal (whatever you want to call it) will be subject to a vote by the Cypriot parliament, with no guarantee of passage.