The Cypriot banks did what all banks do. They gambled. They borrowed money by taking in deposits as well as selling bonds, promised to repay, and then invested in assets they were sure would pay off. These assets included lots and lots of Greek government bonds.
Didn't someone around the table in Brussels raise their hand and say, "Hey, wait a sec... do we really want to levy this tax on a banking system that's already teetering?"
Europe has more than an immediate economic and financial interest in working with Cyprus to stabilize an increasingly volatile situation. And it should do so driven less by the need avoid an institutional Eurozone exit and more by the importance of fundamentally restoring growth and hope to Cyprus.
As they scramble to sort out the mess in Cyprus, European officials would be well advised to constantly remind themselves of a reality that I suspect extends across the continent: Despite all the happy talk about smaller deficits and lower sovereign credit spreads, citizens are yet to feel any notable improvement in their actual standard of living and in their prospects. Day in and day out, this situation undermines the population's confidence in the timely responsiveness of their elected representatives, the political system and traditional political parties. The longer this persists, the harder it will be to pivot to the type of policy reforms needed to decisively avoid more years of economic difficulties.
Slate's Matthew Yglesias writes columns about economics and finance. Yglesias has been writing about Cyprus, and my critiques of the policies he has been proposing are the subject of this column.
It might be hard to grasp if you live on the Mediterranean shores of Europe, but the Northern countries of the continent consider the southern countries' debts and high levels of spread Catholic sins.
Bankers -- and I kid you not, they do believe this -- are absolutely certain that they are victims of what has occurred, and for that reason are in no way or manner responsible for the ongoing crisis that is still destroying the economic prospects of tens of millions of people.
In the real world, the alternative to this "chaotic" election isn't a business-friendly utopia; it's weeks of rioting shutting down Rome, or even worse, the Arab Spring. So who cares if the Italian people voted for the 'wrong' parties?
The current crisis is an opportunity in disguise. If the European leaders seize the chance, they can improve competitiveness and thereby living standards in the south and east, while increasing the legitimacy of the EU at the same time.
It is still winter in the northern hemisphere, but there is never a bad time for spring cleaning. I suggest that policymakers de-clutter their to-do lists by focusing on three priorities.
After five years of a deepening economic recession and growing unemployment in Greece, one may wonder whether there is now hope ("elpida") for an end to the Greek fiscal and debt crisis, the restoration of the country's competitiveness, and a sustainable recovery of growth and jobs.
Little has been done to correct the fundamental flaws that spawned Europe's ill-fated common currency, the Euro. Premature optimism relieves Europe's ever cautious policy makers from taking the bold steps needed to truly stem the crisis.
To date the EU, which is still a work in progress, has shown remarkable resilience in dealing with the crisis. We have some way to go but let's at least acknowledge the progress that is being made.
While bankers and high-profile economists are largely to be blamed for the present crisis, our politicians contradicting their promises for better management of the economy seek financial advices from the same bankers who caused the crisis.
Greece is regressing. As it becomes poorer, its environment suffers more. If you ever needed an illustration of why affordable energy is important for the environment, Greece provides it.
Huge strides forward in Europe and subsequent market rallies have raised hopes for the region. So is the road to recovery now clear or are significant risks still present? Crucially, what are the key areas of conflict we should be watching closely and which are 'red herrings'?