More woes for the Euro

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The Cypriot debt crisis and bailout shows that there still more woes for the Euro in the pipelines before the crisis can be averted
The Cypriot debt crisis and bailout shows more woes are ahead for the Euro. Photo-Leonid Mamchenkov/Flickr

The Eurozone has seen enough turmoil recently, but a new wound has been opened up by the prospect of yet another bailout. This time, it is the future of Cyprus which is in the hands of Eurozone politicians and regulators. A proposed bailout package for Cyprus is in the works in the form of a deposit levy in order to boost government revenues and it is seeing strong opposition from all quarters within the country. As this news leaked out over the weekend it has led to another fall in the value of the euro, threatening the survival of the currency and of the Eurozone itself.

The levy is being supported by the Cypriot president Nicos Anastasiades who has asked the levy to be enforced by the parliament when it comes for a vote today. The plan would levy a tax on each bank account intended to raise 5.8 billion euros. Strong opposition to the tax has seen the imposition of the tax. Scenes from 2008 were revisited in the streets of Cyprus as people rushed to withdraw their deposits from the banks in fear that they would be forced to pay the tax involuntarily.

Fears of capital flight were also raised and could disrupt the operations of the country right now. At a micro level, the country could see a drying up of investment and much needed liquidity from the economy. On the other hand, the bailout package could also be in danger as the tax is meant to show intent from the government and its commitment towards following through on their promises. For the European Union, this can also have implications as a mass capital flight can endanger the survival of euro as a currency and the existence of EU as a whole.

Experts say that the exodus of funds shows that another measure of austerity are not working and that different tools are required in order to counter the situation. Following the announcement, many investors abandoned the euro and went into safer commodities like gold and oil in order to protect themselves. The tax can also have implications for the future as other countries might also be enticed to use this manner to raise their revenues and punish people for saving.

Saving is important in an economy as savings from one man are used to loan out to another hoping to stimulate the economy. With one side of the equation being punished and diminished, it could mean that investment can dry up for the economy and the region on the whole. With the deadlock in Italy and ineffective government in Spain and Greece, this will only prove to be a further blow to the bailout plan for the debt ridden countries. Some of the concerns of the depositors have been eased by the government saying that depositors will get share in gas reserves of the country in the future however people feel that it is a promise that would not reap the desired benefits.

The early reaction to the levy has been shown by the people with their feet as they have walked onto the banks to withdraw their deposits which have been frozen by the government. It seems that the unpopularity of the tax can spill into the streets in the form of protests. There are more woes for the Euro yet to come it seems.

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