Some Lessons of the Cyprus crisis

Kindly translated by Anne-Marie de Grazia.

Time has now come to draw the lessons from the Cypriot crisis. The latter was important not by reason of the country’s size – Cyprus represents only 0.2% of the GDP of the Eurozone – but because of the measures taken and of their consequences. They prove that Cyprus, never mind its size, has shaken the Eurozone to its depths.

The Euro crisis has moved to a qualitatively higher phase.

First of all, the crisis broke the taboo on tapping bank accounts. Granted, accounts of less than 100,000 euros will not be touched, in spite of the first salvage plan, which had been agreed to by the whole of the Eurogroup. Or at least, they will not be touched now… But the idea that Cyprus stood as an exceptional case, as French President François Hollande repeated again anda gain in his interview of France-2 television channel on March 28th, is dead and buried. Klaas Knot ,a member of the ECB Counsel, declared on Friday, March 29th [1]  that he agreed in principle with the highly controversial statement made by Jeroen Dijsselbloem, the President of the Eurogroup [2]. This new policy is a direct consequence of German pressures. Mrs Merkel took the opportunity of the Cyprus crisis to clearly state that it was out of the question to go on tapping German taxpayers. [3]. It’s a position one can very well understand. But it brings with it the end of the Eurozone, for two reasons. On the one hand, if it is understandable that the shareholders of a bank may be taken to task, affecting the depositors is broadly counterproductive because of the panic effect (the “bankrun”) which it risks entailing. On the other hand, if Germany no longers wants to pay, and it would have to spend 8% to 10% of its own GDP every year in order to keep the Eurozone functioning [4], the latter is doomed. Thus, this crisis reveals itself to be not a minor episode in a well-controlled process, as maintained by the French President on France-2, but indeed a new qualitative leap, according to the words of Paul de Grauwe, an economist at the London Business School [5]. This is the second lesson one can draw from the crisis. This qualitative leap, the effects of which we will see in the case of Slovenia, which a few weeks from now will be asking for help from the Troïka, already has consequences for the two countries which are most directly threatened by the new Bruxello-German doctrine: Spain and Italy. We will need to watch closely in the coming weeks how deposit amounts in Italian banks are to evolve.

The market yields to state regulations.

These were not the only lessons. We were able to verify between March 16th and 29th two important matters. First of all, that control of capital markets do works. It is true that they are not completely tight, but they have at least prevented a bank run in Cyprus when the banks reopened. Still, these controls need to be thorough and thoroughly devised. If the closing of Cypriot banks did not prevent some to draw out their money, this was because one had omitted to close the subsidiary branches, or at least, to forbid them any operations involving accounts held in the parent banks (Cyprus Popular Bank and Bank of Cyprus). It is for this reason that the amounts taken from accounts over 100,000 euros will amount to 60% at the minimum, instead of 30% as had been initially announced. Controls were not sufficiently reflected upstream, or then, maybe there were collusions inside the Cypriot banking system [6]. Whatever the case, it would not have been very difficult to implement a closing of the banks which would have proven genuinely tight.

But it also means that such measures cannot be improvised. They must be elaborated by persons knowledgeable in the varied tricks, the “schémas,” as one would say in Franco-Russian, with which these regulations can be circumvented. This implies giving important and discretionary powers to the Central Bank of the country in question, in particular, to interrupt all computer links between banks, and turning said Central Bank into a key element of the economic security of the State which, as such, must imperatively return under the State’s supervision. This validates a posteriori what I wrote in 2006 on the necessity of an “economic Article 16″ [of “President’s exceptional powers”], enabling the government to remove itself from normal rules and from treaties signed, in order to impose the respect of the content of the Preamble to the [French] Constitution [7]. I got back to this point in a working paper released in April 2011 under the title: “Should we have to leave the Euro…” Clearly, the necessary measures demand to strictly subordinate the Central Bank, in our case the Banque de France, to the government, be it only temporarily.

Control of capital and Euro-exit

Another series of lessons relates then to the safeguard measures taken by the Central Bank of Cyprus, and especially to the establishment of a strict control of currency exchanges. We take note, here, that this return to capital controls and currency exchange controls was foreseeable, as had been stated in earlier notes [8]. This tallies as much with reality, as could be observed in other countries (Russia, Argentina) [9], as with a spectacular evolution in the doctrine of international organizations, first of all of the IMF [10]. But what is important here is that, without any fuss or drama, two euros have been created, a Cypriot one of limited fungibility, and another one for the use of the Eurozone. Those who conceived this system did not realize that in so doing they were delivering the demonstration that nothing could be easier than to leave the Eurozone. The whole discourse about the catastrophic aspects of such an exit collapses when confronted with the facts: in reality, once one has accepted finding back to “financial repression” (and being aware that one may be able to repress people or opinions, but certainly not financial fluxes…), nothing could be simpler than getting out of the euro. AsAlexandre Delaigue explained on the site of France Info : « As has been noted by many commentators, since capital controls have been in place in Cyprus, if the Cypriot currency is still called euro, in practice, one euro in a Cypriot bank is no longer equivalent to one euro somewhere else. Accounts over 100,000 euros are blocked, withdrawals are limited, as well as one’s capacity to transfer one’s money outside the Cypriot borders. As long as these controls are in place – and we don’t know when they will be lifted – Cyprus will have another currency, the parity of which is officially fixed at one euro, just as the dollar of the Bahamas is pegged to the US dollar. These controls lift one of the principal obstacles advanced until now against the exit of a country from the euro; the economic disorganization which would result from it, the necessity of putting in place drastic controls of capital in order to prevent the flight of currency assets during the time of the changing over of the money. These controls are in place and a seizable part of the exits of capital has already taken place; practically speaking, it has become possible for this country to return to its former currency, the Cypriot pound.  [11]»

Thus, by trying to keep Cyprus in the Eurozone at any price, the most resounding demonstration has been given that such an exit was technically possible without drama or an apocalyptic crisis. This is not the least of the lessons to be learned from the Cypriot crisis, and it is one which we would should learn by heart.



[1] (Reuters) – European Central Bank Governing Council member Klaas Knot said on Friday there was “little wrong” with Eurogroup chair Jeroen Dijsselbloem’s recipe for dealing with future euro zone banking crises, Reuters, le 29 mars 2013, URL :

[2] Claire Gatinois et Jean-Pierre Stroobants, Les débuts difficiles de Jeroen Dijsselbloem, rebaptisé “Dijsselbourde” , Le Monde, 27 mars 2013,

[3] M Persson, « Euro crisis: After the Cyprus bank raid fiasco, Germany is being painted as the EU’s chief villain », The Telegraph, 31 mars 2013, URL :

[4] Jacques Sapir, “Le coût du fédéralisme dans la zone Euro”, billet publié sur le carnet Russeurope le 10/11/2012, URL:

[5] RTBF, « Chypre: “La zone euro est devenue plus fragile, le risque a augmenté” », 31 mars 2013,

[6] La Voix de la Russie, « Chypre : la famille du président sort sans préjudice des millions de Laiki Bank », 31 mars 2013, URL :

[7] Jacques Sapir, « La Crise de l’Euro : erreurs et impasses de l’Européisme » in Perspectives Républicaines, n°2, Juin 2006, pp. 69-84.

[8] Jacques Sapir, “Les contrôles de capitaux : une idée qui fait son chemin”, note published on the carnet Russeurope on 29/01/2013, URL:

[9] B.J. Cohen, “Contrôle des capitaux: pourquoi les gouvernements hésitent-ils?”, in Revue Économique, vol. 52, n°2/mars 2001, pp. 207-232, p. 228.

[10] J. Ostry et al., « Capital Inflows: The Role of Controls », International Monetary Fund Staff Position Note, Washington (D. C.), FMI, 2010

[11] Alexandre Delaigue, « Chypre doit-elle quitter la zone euro? », France-Info, 31 mars 2013, URL :

Jacques Sapir

Ses travaux de chercheur se sont orientés dans trois dimensions, l’étude de l’économie russe et de la transition, l’analyse des crises financières et des recherches théoriques sur les institutions économiques et les interactions entre les comportements individuels. Il a poursuivi ses recherches à partir de 2000 sur les interactions entre les régimes de change, la structuration des systèmes financiers et les instabilités macroéconomiques. Depuis 2007 il s'est impliqué dans l’analyse de la crise financière actuelle, et en particulier dans la crise de la zone Euro.

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