The bailout of Cyprus, a small 9,200-square kilometer island that only represents 0.2% of Europe's GDP, threatened major stock markets yesterday. The Ibex posted the greatest losses among European markets as it fell 1.29% after trimming heavier losses from morning trading in hopes that the situation in Cyprus would clear up on Thursday when the nation's parliament votes on a tax set to hit savings account holders there.
In an unprecedented decision for Europe, taxes will be placed on savings deposits in order to help defray the costs of restoring financial stability to Cyprus. An additional 3% in taxes will be levied on savings deposits under 100,000 and 12.5% for savings deposits greater than 100,000. The measure has spawned widespread discontent in the euro zone -- particularly the peripheral nations. Moreover, the fear of new tax restrictions in Spain and Italy could cause capital to flee these countries and undermine many of the positive fiscal developments made there.
So the Eurogroup should make it crystal clear that the measure is not intended to cause pain for struggling Southern-European nations, but to do away with a banking model that functioned as a tax haven and money laundering vehicle for many years, especially for wealthy and mob-connected Russians. Harming ordinary citizens will obviously be contentious, but we should not forget the bright side: distributing the financial burden of a bailout among Cyprus banks and tax holders can keep the country away from bankruptcy and ensure that it continues to use the euro as its currency.