The Haircut (2013): For the first time in the financial crisis, bank accounts are being raided and people’s savings are being seized. We look at the fallout of the EU’s cruel gamble, exposing the human cost that’s devastating Cyprus.

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In Cyprus the confiscation of bank deposits has been labelled ‘the haircut’, all too benign a way to describe what’s happening. In return for 10 billion Euros of financial assistance, the European Commission, the European Central Bank and the International Monetary Fund have applied a cut-throat razor. The cuts it has imposed will devastate Cyprus and undermine confidence in banking Europe-wide. “We had a gun to our forehead and were told we are going to pull the trigger if you do not accept an arrangement like this,” Michael Sarris, Cyprus’s former Finance Minister and the man who signed the deal, tells us. He says it was out and out bullying and if Cyprus hadn’t accepted it, they would have had their economy smashed. But the outlook is pretty gloomy anyway. A few years ago Cyprus had full employment; economists expect in the coming months it could reach 35% unemployment. House prices dropped by up to 25% in one day. As the Cypriots watch their savings and their economy disappear before their eyes, they feel they are part of a very cruel experiment. “We feel we are being used as a guinea pig here. Europe wants to see if this will work and then they can do it in another place.”

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The European Union’s bailout of the tiny Mediterranean island of Cyprus in 2013 proved to be one of the most vicious and controversial in the history of the bloc. The rescue effort, which was intended to stabilize Cyprus’ ailing economy and prevent a default on its sovereign debt, ultimately had far-reaching consequences for the island and its people.

At the time, Cyprus was facing severe financial crisis, fueled in part by its over-reliance on its banking sector. The country’s two biggest banks, which had invested heavily in Greek debt, were on the brink of collapse, and the government was running out of money. As an EU member state, Cyprus was eligible for a bailout from the European Stability Mechanism (ESM), the EU’s rescue fund.

The terms of the bailout, however, were widely criticized for their severity. Under the agreement, Cyprus was required to raise billions of euros on its own by imposing harsh austerity measures on its citizens. The country was also ordered to close one of its major banks, Laiki Bank, and impose losses on depositors with more than 100,000 euros in the remaining bank, Bank of Cyprus.

This “bail-in” of depositors was unprecedented in the EU and sparked outrage among Cypriots and investors who saw their savings wiped out overnight. The move was also seen as a violation of the EU’s deposit guarantee scheme, which was supposed to protect savers in the event of a bank going bust.

Moreover, the bailout terms exposed the deep fault lines between northern and southern Europe. The German government, in particular, was blamed for imposing harsh conditions on Cyprus, which was seen as a small and weak country at the mercy of powerful EU institutions.

The repercussions of the bailout continue to be felt on the island today. Banks have struggled to regain the trust of depositors, and the economy has yet to fully recover. The bailout also led to the rise of anti-EU sentiment in Cyprus, with many blaming Brussels and Berlin for the harsh treatment of their country.

In hindsight, the Cyprus bailout can be seen as a turning point in the EU’s response to the financial crisis. The harsh conditions imposed on Cyprus served as a warning to other countries, such as Greece, that they too could face severe consequences if they failed to reform their economies. The bailout also exposed the fault lines between EU member states and highlighted the need for greater solidarity and cooperation within the bloc.

Today, Cyprus remains a member of the EU, but the scars of the 2013 bailout run deep. The lessons learned from the experience may yet have implications for the future of the bloc, especially as it faces new challenges such as Brexit and the Covid-19 pandemic. Only time will tell if the EU can learn from its mistakes and build a more stable and equitable future for its member states.