Cause of Cyprus Bank Crisis Stems From the European Union


The euro was preceded by several efforts to get European currencies to vary together relative to one another to the point, where they could be replaced painlessly by one currency - for more information, you might look up "the snake in the tunnel".

Theoretically, the single currency would remove the exchange costs of continental trade, but it would also take away monetary sovereignty from the countries using it. Fiscal policy, on the other hand, was governed by the Maastricht criteria, stipulating a max deficit of 3% and maximum debt of 60% of GDP, with a constant inflation test of 2% over 2 years in the ERM-2 mechanism, before new Eurozone members could be admitted.

A fundamental problem planted with the seed of the Eurozone is that European economies are not similar to one another in the way of efficiency, capacity, productivity, energy intensity, or output. These qualitative differences make certain EZ members pay more and others benefit more from the monetary union.

To compete, the less economically dynamic countries of southern Europe attracted capital to become more equal to the more competitive northern economies - these capital flows typically came from Germany in the form of loans, guaranteed by Greek, Italian and other obigations.

Without structural reforms or targeted investments to improve competitive advantage, the debtor countries failed to generate the growth and revenue to support their debt obligations - a problem made worse by the onset of the financial crisis, which brought to bare these fundamental contradictions of the Eurozone.