FUTURE historians will marvel at how quickly she bounced back. A tiny island on the periphery of Europe, during the boom years her financial sector expanded until it was several multiples of her GDP. When the flow of candy floss credit dried up, she was brought low by the collapse of her banking sector and crippling debt.
Yet a mere five years later, her economy enjoyed growth among the fastest of any Western country, far outstripping the European average. Her obligations to the IMF were fulfilled. Her public debt was traded on the international bond markets. I refer, of course, not to Cyprus, but to Iceland.
“But Iceland,” you pipe up “is different from Cyprus. She had her own currency outside the euro”. Indeed. This is why Cyprus must follow suit and re-establish her own currency.
It is crunch time for Cyprus. In a world of instant, online banking, the country has reverted to a pre-modern cash economy. Decisions made in Brussels, Berlin and Nicosia will determine if she is going to remain in peril. Or if, like Iceland, she bounces back.
In order for Cyprus to remain in the euro, her banks must be bailed out. Somebody somewhere has to cough up sufficient sums of money so that banks can reopen. The high drama of the past few days has hinged on the question of who is going to pay for this bailout. “Not without the depositors taking a hit too,” said the Eurozone. “Probably not,” said Russia. “Not on your nelly,” said ordinary Cypriots.
But any bailout would be bad news for ordinary Cypriots. Any “rescue” means debt and dependency stretching ahead from one generation to the next. In a world of least worst choices, Cyprus should take the Icelandic option; default, decouple, devalue.
“Default on debts!” you cry aghast. “Outrageous!” But the alternative would be even worse. It is a feature of all civilised societies that a debtor’s debts can, after a certain point, be wiped clean. The alternative would be to reduce those who have acquired unmanageable debts to the status of a serf or slave.
There comes a time when debts are less the liability of the person who borrowed, and more the responsibility of whoever lent the money. Cyprus is at that stage. Ordinary Cypriots should not be sacrificed to save foolish bankers from their own folly.
When the banks in Nicosia reopen, they should do so having stamped each euro note with a “Cyprus euro” sign. “But such Cyprus euros would be worthless compared to real Euros,” you retort.
But if the only way that Cyprus can be “saved” is to impose capital controls to prevent people moving their money off the island, does that not already mean that the value of a euro in Cyprus is well below that of a euro in the rest of the Eurozone? Capital controls in a monetary union? Does that not tell you that it is over?
And besides, devaluation is precisely what Cyprus needs if she is to recover. It was the massive devaluation of the Icelandic krona that allowed her to begin to export her way back to prosperity. It was the extraordinary good bargains that her currency collapse made possible that explain why outsiders have started to invest in Iceland once again.
Douglas Carswell is Conservative MP for Clacton.