Sautet on Cyprus and the European Union

by Don Boudreaux on March 31, 2013

in Current Affairs, Debt and Deficits, Hubris and humility, Other People's Money, Reality Is Not Optional

Normally I would wait until I assemble one of the Cafe’s “Some Links” offerings, but Frederic Sautet’s post on Cyprus and the E.U. is so good that it deserves its own unique pointer.  Read it in full, but here’s a slice:

As many commentators have said, the Cyprus problem, like that of Italy, France, Greece, Portugal, and Spain is one of public finance. As the EU moved from a free trade zone to a political system after the ratification of the Maastricht Treaty in 1992, it also (among many other things) progressively collectivized the risks associated with public spending. Until the euro came along, countries with bad public policies would simply devaluate their currencies. The French government, for instance, devaluated the franc twice (in 1981 and 1982) under Mitterrand’s presidency and in 1983 the Deutsche mark and the florin were reevaluated against all the other European currencies. Under this system the consequences of bad public policies are internalized to a large extent. The euro changed that. Bad policies are now either kept in check at the country level because no currency devaluation is possible (that’s the positive scenario), or the consequences of bad policies are born by the entire system. This, of course, is only if EU authorities want to keep the euro zone intact, otherwise they could simply let Greece and Cyprus out of the euro zone, but this would be to admit the failure of their grandiose currency plan. This is why the European Central Bank is resorting to Stalinist methods to make sure the government in Cyprus does what the EU wants it to do.

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