Measures being pursued by the Eurozone to force bank depositors in Cyprus to pay for the bailout of their country marks a new unfortunate twist in the financial crisis and one that ultimately could spell the doom of the euro itself.
Banks are crucial to the functioning of an economy and once they cease to function so does the economy. Yet Eurozone policy makers with the support of the International Monetary Fund are pursuing moves that further endanger the already fragile financial systems of peripheral Eurozone countries.
Avoiding the specter of bank collapses, which are often preceded by runs on deposits, has been one of the cornerstones of banking regulation since the Great Depression of the 1930s. Depositors in the Eurozone generally have believed their money to be safe in banks, but after the raid on Cypriot savers many are having doubts, particularly in peripheral Eurozone countries.
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The next time a Eurozone country looks likely to need rescuing, such as the much larger Spanish and Italian economies, the most logical step for depositors in those countries will be to withdraw their money from banks as fast as they can to avoid the fate of Cypriots.
