In the early hours of the 25^th of March, Cyprus and the EU struck a new deal on the conditions of emergency financing. It is slightly different from the first deal which was rejected by the Cypriot parliament after strong social protests. This time, it is not all depositors which will have to pay a special tax, but the owners, creditors and large depositors of the hitherto two largest banks will suffer huge losses. The deposits below 100,000 euros will not be affected any more. Therefore, the new pact is distributionally less asymmetrical than the first one. However, the effect of the measures on the Cypriot banking sector and the whole economy will be devastating. An oversized banking sector will be in shambles, but no steps towards an alternative development model are taken. For the whole South of the euro zone, EU policies provide shock without therapy. The disastrous handling of the crisis in Cyprus brings the euro zone closer to an eventual rupture.

Cyprus is the first case where the troika of EU, European Central Bank and International Monetary Fund was obliged to modify its original plan because of popular and institutional resistance. Contrary to the original plan, owners and creditors plus the large depositors of the two largest Cypriot banks which were particularly heavily hit by the crisis and EU policies in Greece will have to pay part of the bill. A new law that was passed under the pressure of the EU last week bestows sweeping powers to the Cypriot central bank in closing down and restructuring banks. Laiki Bank, the second largest bank, will be liquidated. Its deposits below 100,000 euros and “good assets” will be transferred to the largest bank, Bank of Cyprus. The rest will be transferred into a “bad bank” that will be gradually liquidated. The Banks of Cyprus will be recapitalised what will entail heavy losses to owners, creditors and large depositors. According to press reports, the latter might lose about 40% of their deposits.

This drastic restructuring plus the initially planned for special tax on all deposits have shaken the trust into the Cypriot banking system. The reopening of the banks has been postponed several times. The authorities fear a run on the banks which would be clearly induced by the clumsy EU policies. Controls on capital flows have already been introduced, and withdrawals from accounts will clearly be restricted for a quite a time. Thus, it is not only the banking sector which is in shambles, but the payment system on the island will not be functioning properly for quite a time. Thus, all other sectors of the economy will suffer as well.

Though the EU officials invoke now the necessity to reduce an oversized banking sector for the measures in Cyprus and the vulnerability of such growth models has not been a secret, they have not taken any systematic measures in Cyprus or in other EU countries like the UK, Luxemburg or Ireland in order to facilitate a restructuring of the finance sector. Though the EU officials have tried to emphasize how special the Cypriot case in their eyes is, a more general discussion on the finance centres with low taxes and lax regulation has started with Cypriot case. This has opened rifts in the core of the euro zone. Luxemburg’s minister of finance, Jean Asselborn, reacted angrily to demands of his German colleague, Wolfgang Schäuble, that Cyprus should change its “business model”. Asselborn perceives a more general pressure of the big EU countries to put their competitors in smaller financial centres under pressure.

In Cyprus, the EU simply erases one of the only two key sectors of the island’s economy. Tourism, the other key sector, does not provide a developmental alternative. Industrial underdevelopment is even worse than in the other Mediterranean EU countries. In 2012, manufacturing contributed only 5.9% of the GDP and 8.2% of employment. The current account has been deeply in deficit for many years. In a couple of years, gas deposits might be exploited, but this does not help now. A very deep recession which will lead to mass impoverishment will with all likelihood result from the shock without therapy. The building of new development model would take years and necessitate policies (like protection of new industries) that are hardly compatible with the EU integration model.

Cyprus is clearly – in an accelerated way – in the same downward spiral of the other Southern euro zone countries: Austerity leads to recessions. Due to the recession, the budgetary situation deteriorates. This is used as a pretext by the Troika to impose radicalised austerity measures. The burden of the crisis is unilaterally shifted to the peripheral countries – and in particular to the workers and the middle class of these countries. Core countries, in particular the German government, and the ECB put the Cypriot government under enormous pressure to accept the draconic measures. The ECB threatened in both final negotiation rounds to cut off funding for Cypriot banks. Given this type of asymmetries in the euro zone, the Financial Times commentator Wolfgang Münchau concludes: “The break-up of the eurozone edges even closer”. Protestors in Nicosia demanded exiting the euro zone.

German industrial corporations already started to divert exports away from the South European EU countries towards China, Brazil and other rising economies in the South. The EU Commission and the main EU governments are, however, orientated towards strengthening links with the other two declining powers – the US and Japan. With these two countries, free trade agreements are to be negotiated as part of an outward looking model. EU officials proclaim that such agreements will create growth and jobs. However, the economy and domestic demand are at best stagnating in these countries. Therefore, these promises sound hollow. The real purpose of the negotiations seems to be lowering social and ecological standards. And this is totally in line with the inner EU policies.