Lessons of the Euro Experiment: Cyprus in the Crosshairs

The Euro-Cyprus saga took on a new twist when it was finally confirmed that depositors in Cyprus with more than EUR 100,000 (USD 128,000) will have to lose up to 60% of their savings. This "sovereign thievery" will consist of 37.5% conversion to bank shares and an additional 22.5% will be deducted, really stolen, from the accounts to prop up bank reserves of Cyprus' two largest banks, Bank of Cyprus and Popular Bank of Cyprus.

The repercussions of such a plan will certainly be profound and deep, not to mention the economic and financial toll it will exert on the Cyprus economy as well as the tarnished image of the Cypriot banking system that will hover for the next ten years or so at least. To prevent a bank run, Cypriot banks have instituted daily withdrawal limits for both individuals and businesses, but such measure will only delay the inevitable, after one month, when it is expected that such controls will be lifted, foreign depositors will definitely scramble to leave the Cypriot banking system - without a doubt, many for good.

The Euro's reputation as a stable and respectable international currency had nosedived since its adoption ten years ago, some pundits are even predicting that by 2020, it will be extinct. For all its recent maladies, the euro can teach the world a lot about the adoption common currencies, and one thing that screams out from the euro experiment is the undeniable fact that the adoption of a common currency will never be sustainable if the countries that form to use it are not politically, socially and economically integrated.

Unlike the United States, Europe is a patchwork of countries of differing political, social and economic shades. Northern Europe for example is politically stable, socially progressive and economically dynamic, which is exactly the opposite of the countries on its southern peripheries. Italy for example is ruled by a bunch of geriatrics with its quintessential poster boy Silvio Berlusconi and his bunga-bunga parties, has a social culture that emphasizes seniority rather than meritocracy - thus stifling creativity and the promotion of a rigid upward mobility almost tantamount to rope climbing wherein people who are young, no matter how creative and efficient, will have to defer to older seniors no matter how inept and moribund they seem. In addition, Italy is really an economically divided country dominated by the industrial north and the agricultural, crime ridden south.

In hindsight, the euro was never and can never be sustainable and one day will have to buckle under the weight of its profligate, less efficient, and less competitive southern members. Greece and Italy for example have tax collection rates that are laughable for developed countries, collecting less than 30% of their due taxable income. Greece is the ultimate example of a reckless economy who since becoming a member of the euro did nothing but spend and spend, neglecting to undertake painful but essential social and political reforms such as trimming the bloated bureaucracy and improving the tax collection system.

For its failure to truly integrate its members politically and economically at least initially, the euro was doomed to produce a Greece and a Cyprus. Where else in the world can you see a single currency valued more in one place and valued less in another when both places are using and adopting such currency than the euro in Cyprus. The euro can never succeed simply because the countries that make the eurozone are not only politically diverse, they are fundamentally culturally apprehensive to each other - with a proven history of animosity and distrust. Even Germany and France, the founding members of the euro, were at loggerheads about important policy initiatives at the start of the Greece fiasco.

In addition, Europe is linguistically as it is culturally diverse. They don't really share a shared national ethos and dream. The vested interests of each national elite where shown during the discussions to bail out Greece, with some countries opposed to giving their hard-earned money to a spendthrift economy. Europe's linguistic diversity is its greatest Achilles' heal, since it is language which gives a sense of belongingness, a sense of shared historical experience and a sense of oneness. A single currency will never be able to offer that emotional bond, since if any, it can only offer a sense of good feelings during good times, when bad weather strikes as what happened with Greece, countries in its core will naturally revert to their own national interests, a natural defensive reaction.

It is inevitable therefore that the euro will not leave up to exist to the middle of this century. It will limper for a few years or so, but ultimately, it will sink into the quagmire of repeated financial troubles that will ultimately exhaust the patience of investors and the resolve of its smorgasbord of citizens. History will judge the euro experiment as a brave endeavor, but other than that, it will go down in history as the most costly, one-sided banknote that only really benefited the rich northern countries, most especially Germany, the world's second largest exporter as of 2009.

The Cyprus saga will redound as a painful consequence of Europe's failure to have a synchronized political system that allowed certain countries to borrow their way into progress, engage in reckless expansionism and implement prudent financial practices. The massive losses that depositors in Cyprus will have to swallow will forever tarnish the Cypriot banking system and ultimately, the integrity of the euro itself.