Disparity in the Responses to the European Financial Crisis: Cyprus and the State of Bail-In Policy

Abstract

The end of the first decade of the new millennium was marred by a sudden and precipitous economic collapse, the likes of which had not been seen in nearly a century.This was not a localized affair but a globally-linked recession that touched nearly every nation in the developed world. The Eurozone, which had only just made its first tenuous steps towards monetary union, was among the hardest hit by the disaster. The focus of the Eurozone's distress were the "PIIGS" states-Portugal, Italy, Ireland, Greece, and Spain. In response to a combination of poor capital controls and irresponsible investing, The ECB, however, did not respond to Cyprus with the same set of financial and monetary restructural requirements it did in response to the rest of its irresponsible children. It punished the island nation for its close ties with Russia by instituting an unprecedented bail-in policy that to this day risks the economic stability of Europe.While this study gives a brief analysis of the factors that led to the financial collapse within several of the PIIGS states 1 and the ECB's response to each case, my main purpose is to demonstrate how the ECB's disproportionate punishment of Cyprus has 1 Since Italy has yet to receive a bailout from the ECB, it will not be examined in this paper.Hess 3 risked leading the Eurozone down a dangerous financial path from which it may not be able to recover.