Don't blame Cyprus if the Eurozone struggles

The story we've been seeing in the Eurozone has been of weak economies and a strong Germany. But now German data has been deteriorating (this morning's data showed an unexpected rise in unemployment).

Over the past week we've seen the Bank of Spain predict that Spanish GDP will fall by 1.5 per cent this year (it fell by 1.4 per cent last year). Today the head of Italy's statistics agency, Enrico Giovannini, said that Italy's economy may contract by more than the 1.3 per cent predicted by government.

Yet we're told the crisis is over, that recovery is on the way. Spainsh finance minister Luis de Guindos said in an interview on Sunday that he thinks Spain will have growth by the last quarter of 2013 and one per cent growth next year. Giovannini said that "the result may be worse than currently forecast, with no recovery until the last quarter of the year or early 2014." Yet evidence of this recovery is nowhere to be seen.

Cyprus is getting a lot of attention, but it's a tiny island with a population of around 800,000. Given it has been one with a huge financial sector (relative to its GDP) but it's still a speck. Cyprus has been interesting because it serves as a test case for the European Union to deal with collapse, not because its neighbours rely on it (although Russia might suffer).

Cyprus' situation might be fairly unique, but it's not the only Eurozone economy in trouble:

Over at ZeroHedge they suggest that it isn't [unique], lots of other countries have banks with assets well in excess of GDP. Economist Lars Christensen says that it is, Cyprus didn't experience a nominal GDP hit like the other struggling countries of the Eurozone.

(Full article)

For what it's worth, both Paul Krugman and Tyler Cowen think that Cyprus should now leave the euro. Either Cyprus leaves the euro, or the euros leave Cyprus when capital controls are loosened. But the bad news for the rest of the Eurozone began before Cyprus kicked off, the worry is that if politicians couldn't handle Cyprus, they certainly aren't competent enough to handle future crises in large economies.