Bradut I don't know about theories, but there are certain Realpolitics that are revealed here. I would argue these are: (i) the only thing worse than being rescued, is not being rescued. No country has chosen to go to the wall (the Greek electorate didn't, Cyprus agreed to a bailout on worse terms than it originally rejected etc.); (ii) you can be too small to save; (iii) because of its size, Cyprus is a special case and not a model of how to resolve other countries; and (iv) Germany, in the end, holding the purse strings, gets to dictate terms. The market is thinking about these things and how to weight them. Today (Wednesday March 27) we have seen a sigificant jump in Spanish and Italian 10-year yields to where they were a week ago. However, you could only do the Cyprus solution because you could keep the banks closed and impose capital controls. I don't see how that could work on an Italy or Spain.

I am very worried concerning this development. The respect for private property rights is seriously impeded. As a fiscal measure, it has retroactive effect and with that a breach of the principle of legitimate expectations is also involved. The protection of small enterprises is also at stake and the list can only go on.

The credibility which is an essential mark of any financial activity is basically destroyed and I can't see how the perception can be improved. This measure has certain ingredients of illegal taxation (being in breach of fundamental principles of law) and the justification that among the account owners we might count some Russians with quasi legal or illegal business activities is just a very weak attempt to improve the negative perception.

I know that the average education has been worsened during the last 50 years, but I still consider the attempts of manipulation of the public opinion as quite hilarious. It's an insult to the intelligence of the average people to continue to feed them up with explanations of legitimacy, of the type what I am going to tell to my own voters. If it is the ultimate goal that EU must be about more Europe, then people should be informed in an open manner about the realities and not used as 'numbers' on an electoral roll. The moment 22 is that more Europe is not possible without more democracy and we don't have a clear view on what we mean by that beyond the theoretical discourse. We have a crisis of representation.

The respect for transparency and subsequently democratic governance is endangered by enabling this type of retroactive fiscal liability to be imposed in the case of new taxes with so short notice.

Is it an arbitrary confiscation of property? Is it a punitive tax measure meaning that nulla poena sine culpa and/or nulla poena sine praevia lege poenali may come into question? I'd like also to know for reasons of simple curiosity if such a measure would have been legal under German law and the legal concept of 'Schuld'.

I give by comparative means a perspective on the U.S. law, in order to see how difficult and complex this question really is.

The two main criteria that courts have used to determine whether legislation is an unconstitutional bill of attainder are

(1) whether specific individuals are affected by the statute (“specificity” prong), and

(2) whether the legislation inflicts a punishment on those individuals (“punishment” prong). The Supreme Court has identified three types of legislation that would fulfill the “punishment” prong of the test:

(1) where the burden is such as has “traditionally” been found to be punitive;

(2) where the type and severity of burdens imposed cannot reasonably be said to further “non-punitive legislative purposes”; and

(3) where the legislative record evinces a “congressional intent to punish.”

http://www.fas.org/sgp/crs/misc/R42791.pdf

I want to apologize, dear Bradut for inserting a certain political tone in my comment above, but it's my opinion that no one can understand the situation if the political aspect is not exposed. A cold economic analysis would never have brought the Euro zone in this situation, but we could never afford one unfortunately because of political reasons. It's my opinion (much before the EURO even existed) that democracy must be reinvented and a more direct form of democracy, a more flexible one with several levels of governance must be construed. I don't know any citizen who feels him/herself represented either by state or supra-state governments. A state of permanent crisis has been established and we have been used to choose again and again between two evils.

And now ... to be even more sincere even powerful persons like Merkel or Hollande are in fact caught into a framing that they can not change. We all are wheel runners, this is the mind blowing reality. We must stop run in the wheel, take a deep breath and reassess our actions. Too many lies have been told and there is no one around with a credible poker face. Now let's be honest once again the people with large pockets besides being involved in lobbying, they do some more effort to protect themselves, they think and consider the worse scenario as a possible scenario. I have never heard either in the mass media or otherwise outside the internet a clear and realistic investigation of what can happen if.... and consider that seriously (avoid the temptations to fall into conspirational theories a s o)

The modern politics is our time mythology, it's nothing real, everything is symbolic.

Hey Bradut,

Interesting question! I analysed it in a blog post, so you may want to have a look @ http://finhistomics.com/2013/03/27/cyprus-bulwark-of-capitalism/

Emanuela, you may want to read it as well, I take a different view from yours, arguing in favour.

Sorry for just referring to my blog, I am writing this on my tablet. As soon as I have a keyboard, I will come back and give a more in depth answer.

Dear Thomas, I will maybe surprise you, but we mostly agree on the face of this case. I definitely agree that the situation must be rebalanced and that a totally inoffensive solution is not available. I agree that the bank system in Cyprus (as in Luxembourg and Malta) is over-dimensioned. The bad administration of banks is nevertheless a global problem, not a Cypriot one. We had here in Sweden a crisis in the 90-ties that has been solved by imposing a very strict control on the bank sector, but Sweden is a relatively strong economy with a small bank sector. What I claim is that a German type of solution will definitely fit Sweden and Netherlands, but not Greece, Italy, Cyprus and Malta. If we look in greater detail, each country has its own bank profile.

Exactly as it is obvious that one solution does not fit all is also clear that Merkel and Hollande are representatives of national interests. It's clear to me that we have reached the point where we must decide for more Europe for the EU or no future for the EU. The solution in between is no more realistic. Why? Because the advancement of the economic integration has generated an acute need for political and social integration in the EU and this type of integration requires representation at the EU level (EU-parties, a more federal system). If we are not ready to admit that, then we must be ready to admit that Farage is right, that it was a dream (for him a nightmare in fact) and it's time to wake up.

I definitely understand that what's good for the UK is not always good for Germany, namely even the strongest economies in the EU do not have the same international trade profile. The dismantlement of the EU is not a good solution in any case, but some countries would suffer more than others. At this point EU has external supporters, neither China nor U.S: would enjoy to witness the disintegration of the EU, in a multi-polar world EU is a participant maintaining the equilibrium. EURO is an alternative to US dollar, a necessary one. There are both internal and external interests in favour of maintaining an integrated EU, but this integration requires a more democratic EU, the democracy at the nation state level does not guarantee a democratic exercise at the EU level. (it's necessary but not sufficient)

I agree that some of the member states have been admitted prematurely to the EU and/or the Eurozone, but the admission is a common decision and once admitted they must be treated equally. The reality is that the newer member states have not been treated equally (the human being in general will never run short of reasons to take unfair decisions). The situation has reached this neuralgic point just because all the member states have pretended not to realize that we are heading a turning point. Credit for consumption is a disease that has been tolerated by all creditors lately in order to maintain the unhealthy growth. It's nothing complex in this equation. It's a common culpa.

My questioning refers in conclusion to the measure of expropriation and what I inquire is whether the measure is fair (equal treatment?) and proportional (knowing that the protection of property rights is not absolute). The very idea of duty to pay a debt stands on a foundation of property rights doctrine.

@Dear Thomas,

We seem to be on the same page, as Cyprus banks exposure to Greece seems to be the main reason of bankruptcy. In a sense Cyprus banks management has ignored basic risk management tools such as dividing the risk and managing exposure. It seems many people share the same view in this matter.

@Dear Emanuela,

Politics are at the root of all evils in Cyprus. First of all exposure to Greece smells like politics, the bailout plan was designed at political level. So any political science insight in this manner is a good and required addition to the topic.

@Dear John,

The manner a bailout is designed is maybe more important than the bailout itself. EU can work only if there are some principles that define the union beyond economic power and political influence. The Cyprus initial bailout was designed in a manner that crossed some of those principles, thus undermining the foundation of EU. The plan rejected by Cyprus parliament was deeply flawed, as it contained nationalization of bank deposits. We can live with bank failures, but not with governments nationalizing assets whenever times are rough.

Is there any country or institution or bank which benefited from EU crisis? In the aftermath of the crisis and the new bailout situation in Cyprus, it is legitimate to ask why these member states and the economical forces involved would continue to pump money into a system which would allegedly be not profitable for any one. A continuous crisis, but no clear response just a never ending debate between the adepts of austerity on one side and the Keynesians on the other asking for more public money, but never getting enough. It's sure that some people are not better off, not in Germany and not in Greece nor in Cyprus. But some of them must be enjoying the party. Who are they? (the link leads to some interesting graphs, but the question remains open)

http://www.quora.com/Economics/Is-there-any-country-or-institution-or-bank-which-benefitted-from-EU-crisis?srid=pnNe&share=1

I would say that it was not a bail-out, but a bail-in. I don't think fair that depositors should bail-in the financial system, but I also do not consider fair that tax payers should bail out banks. There are no perfect solutions. Personally I prefer a mix of the two. Equity should be wiped out, and bondholders should step in to the banks capital. If it is not enough large deposits should also step in.

I have always been amazed about the ridiculous of the situation and I will explain my self by giving an example from a little company trading goods B2B. If we set pressure on the sales department to sell more because their income depends on the sales figures (total and individual) we also know that the result will be that some of these transactions are just FIGURES, no cash-in, just glory. The same story has happened in the EU where the big exporters have been less cautious, just to report great and greater GDP and economic growth rates. Knowing that the big exporters are also capable of financing the 'sales reps party' the result should not have amazed anyone. But it does! Why? Because there is not a private party as in my simple example, but a global revelry of the sovereign states. Therefore it is obscene to require that the usual citizen must pay for the negligence of the public actors. In my opinion their culpa is common and they should fully deal with the issue at the public level. I am not afraid of words and therefore I pronounce a very naughty one: write-off the irrecoverable debt. It's just a matter of showing-off political muscles and I find it utterly disgusting. I don't see how destroying Cyprus ability to maintain a decent level of welfare will favour Germany. The fact that politicians' responsibility is time limited (often not more than 4-5 years) brings about the preference for short term strategies that can be harmful on medium/long term.

One of my colleagues wrote an interesting article on the issue. I attach a link and quote from it:

One may find somewhat ironic that Mr Barroso, in his speech in Nicosia on 6 July 2012, announcing together with the president of Cyprus the priorities of the following semester, had to declare that making progress on the Commission’s proposal to set up a banking union would have been crucial, stressing that:

‘Proper supervision of European banks, protection for citizens bank deposits and a framework for dealing with banks in trouble have a direct impact on our citizens.’

http://www.sidi-isil.org/sidiblog/?p=282#more-282