In order to defend the Cypriot economy from the dangers of a wealth flight the government is imposing capital controls to limit the movement of money out of the country.
As Guntram Wolff points out in the FT the danger here is that the Cypriot ‘Euro’ becomes worth less than any other Euro. In fact it just becomes a piece of local currency that looks like a Euro.
Isn’t it the whole point that people can move freely from state to state in search of prosperity?
Any business or resident of Cyprus would find themselves unable to relocate with their wealth to another EU state. If they did go they might be forced to leave their money behind to start again somewhere else in the search for a better life. And which state would take them with no proof of being able to sustain themselves as they got on their feet? The UK? Germany?
Also no-one is likely to want to set up shop or invest in Cyprus for fear of another round of cash-raising. In fact tourists with traveller’s cheques are probably the only visitors they will get now – unless they can get round ATM capital controls for the visitors. In fact will tourists be allowed to enter or leave Cyprus taking Euro cash in or out with them? And what of Cypriots who want to go on holiday abroad or visit friends and relatives? How much money will they be able to take with them and will it be acceptable in the country they visit?
Will we end up with a controlled Eurozone, virtually a ‘prison Cyprus’, within the Eurozone – just to keep this failed experiment from collapsing altogether? Food for thought for any other failing economy currently within the boundary of the single currency.