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ECONOMIST: Cyprus Basically Just Left The Euro

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Joe Weisenthal
Business Insider
March 25, 2013

Economist Tyler Cowen shares some thoughts on the Cyprus deal on his blog, and one line is dramatic but important:

The capital controls will have to be strict.  What will the price of a Cypriot euro be, relative to a German euro?  50%?  I call this Cyprus leaving the euro but keeping the word “euro” to save face.

In other words, because Cyprus plans to impose restrictions on moving money out of the country, a euro in a Cypriot bank isn’t worth what a euro in a German bank is worth.

Ed Conway, the great economics reporter at Sky News, had basically the same thought in a blog post he put up yesterday as he was heading to Cyprus:

If capital controls get put properly in place, it’s the end of this monetary system as we know it – at the very least it’s probably the end of Cyprus’s place within it. A euro within Cyprus will suddenly be worth significantly less than a euro in Germany or, for that matter, Greece. Or to put it in more economic, and slightly more doomsday terms, consider this: there’s a pretty fundamental rule in economic policy that nation states must choose two (but not three) of the following: independent monetary policy (in other words the power to set your own interest rates), a fixed exchange rate and free movement of capital. Economists call this the “impossible trinity” or trilemma, because you can never have all three at any one time. If Cyprus is to abandon the free movement of capital, the next economically-logical step is for it to have its own independent monetary policy, in other words to leave the single currency.

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This article was posted: Monday, March 25, 2013 at 11:31 am

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