Cypriot Euro

The Eurozone: A “Cypriout?”

by Elaine Schwartz    •    Jul 12, 2013    •    439 Views

First people were concerned about a Grexit and now it’s the Cypriout.

A German euro, a Greek euro, indeed all euros are supposed to be the same money. Traveling across the eurozone, in any of the 17 countries with the euro as its currency, people should be able to spend their money freely. However, when one Cypriot businessman tried to purchase an apartment in Greece with his Cypriot euros, he encountered difficulty. His euros at his home bank could not be moved to Greece.

The reason, European officials say, is Cyprus’s recent banking crisis. Fearing bank failures and crumbling insurance protection, depositors sought unsuccessfully to move their money to a safer haven in other eurozone countries. Access was blocked because the flight of Cyprus euros would have contributed to the banking upheaval. With that concern continuing, still Cypriots are prevented from freely spending their euros elsewhere. Bank withdrawals are restricted to no more than 300 euros a day for individuals and no one can take more than 3,000 euros out of Cyprus.

Asked about the status of his country’s euro, one Cypriot businessman said, “Our euro looks like a euro and feels like a euro, but it is not really a euro.

A bailout barometer of weaker eurozone countries:

Eurozone bailouts

 

As economists, we can ask whether the Cypriot euro is really money by looking at the basic characteristics of a valid currency:

  1. Money is a medium of exchange. When you walk into a store and pull out your money, that vendor will exchange it for a good or a service. If a Greek bank refuses Cypriot euros, then they no longer are a medium of exchange.
  2. Money acts as a measure of value. In the US, you know the spending power of $100.
  3. Money can store value. Placing it in a bank or even under your mattress, you know that $100 will have purchasing power that is close to $100 in 2 years.

 

Sources and resources: An excellent recent assessment of Cyprus and the euro, this NY Times article provided insight, Quartz and WSJ were useful complements, and my stats were from WSJ and the CIA World Factbook. For some history of the Cypriot banking crisis and its parallel to US bank runs, econlife blogged here and here.

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