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March 28, 2013

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Any ruminations on what this might mean?

it looks really bad from here.

I think we should wait for the day when euros in Cypriot banks can be withdrawn for cash euros and taken off the island before suggesting that the island is actually staying _on_ the same euro that the rest of the EU uses.

Jonathan: great point! Thinking about it that way only increases my certainty that I was wrong. Cyprus is in a situation in which reintroducing the pound for the "Cypriot euro" has almost no downside --- but a lot of upside. (Namely, the ability to make depositors whole by printing money and the ability to devalue.) Yet they still show no sign of reintroducing the pound! The sacrifices Europeans seem to be willing to make to keep the euro boggle the mind.

Will: I don't understand the question. Could you be more specific?

Well I said before that the legal restrictions on exiting the euro probably made it unlikely that any country would exit unless there was widespread support for leaving the EU as well.

Certainly Cyprus presented the best case yet of a country which could have exited the euro (and the EU) due to the circumstances it faced: in a recent poll 91% of the 1,500 respondents approved of their parliament's rejection of the original deposit levy and would have preferred to leave the EU than to have that levy imposed and around 67% of the same respondents wished to reintroduce the Cypriot pound and forge closer relations with Russia.

However another poll (of about 600 persons) found 62 in favour of retaining the euro.

So overall there might only be a small majority (perhaps 55%) in favour of exiting the euro. And it might be that some people favour exiting the euro but not exiting the EU and if given the stark choice of remaining in the EU with the euro or leaving the euro but having to leave the EU as well they might pick the former option.

Because the euro is linked almost inextricably with EU membership then any cost-benefit analysis of exiting the eurozone would have to factor in the costs v benefits (in the minds of the politicians and the average voters) of dumping the other aspects of EU membership such as the single market, freedom of movement of people, goods, services and capital (well we can ignore the freedom of movement of capital for now considering the capital controls).

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