Institutional Inertia, Ignorance and Short-Circuit: Cyprus

Abstract

Due to its financial exposure vis-à-vis Greece and the large size of its own banking sector, Cyprus experienced severe financial turmoil in 2012–2013. The fiscal position of the country had been deteriorating since 2009, but it was only in May 2011 that the country lost market access, until the situation became critical in June 2012 forcing the left-wing government to turn to the EU and the IMF for assistance. In February 2013, a change of government took place with the electoral success of the right-wing Democratic Rally party. At the same time, the campaign for local elections started in Germany, and the bailout of the Cypriot banking sector became a full-fledged contested issue in German politics. The final solution to the Cypriot banking crisis—negotiated while capital controls were put in place—imposed heavy losses on depositors and creditors of unhealthy banks but was by and large perceived by some sectors of the society—and presented by the media— as an unfair deal. As in other Southern European countries, the management of the Euro crisis was mostly concentrated in the hands of the government, with the Parliament playing a secondary role. Nonetheless, one of the legacies of the crisis is a slightly increased level of parliamentarian control of government’s spending, although a persisting lack of financial and fiscal expertise limits the parliament’s actual capacity to perform systematic checks.