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Cyprus Is Doomed: Why the Country Must Leave the Euro Immediately

The Atlantic (link)

“But the question now isn’t whether Cyprus should keep the euro. It’s whether Cyprus should leave the euro. Those aren’t the same thing anymore. As Tyler Cowen points out, a euro that can’t leave Cyprus is worth less than other euros. Just how much less depends on how strictly Cyprus prevents euros from leaving the country. In other words, as long as it has capital controls, Cyprus doesn’t really use the euro anymore even though its money says “euro” on it. It uses Cypriot euros. And Cypriot euros are worth maybe 95 or 90 or 80 percent, or less, of other euros.

Cyprus is stuck in euro-limbo. It’s not enjoying the benefits of the common currency, but it’s not enjoying the benefits of its own currency either. Not that bringing back its own currency makes sense, right? As Barry Eichengreen points out, countries can’t leave the euro because its banks would collapse and there would be massive capital flight, and … wait. These things have already happened in Cyprus. Its banks just got restructured, and it just instituted capital controls. There’s not much left to lose from euro-exit. And plenty to gain.”

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Posted by on March 29, 2013 in Recommended articles

 

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