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Nobel economist: Cyprus bank deal 'disastrous'

Christopher Pissarides says Cyprus may have to consider ditching euro

Christopher Pissarides, winner of the joint 2010 Nobel Prize in Economic Sciences, attends a session at the World Economic Forum in Davos, January 2012 (Reuters) Christopher Pissarides, winner of the joint 2010 Nobel Prize in Economic Sciences, attends a session at the World Economic Forum in Davos, January 2012 (Reuters) The approach taken by the Eurogroup towards Cyprus "will be disastrous in the long term" and may force the country to rethink its membership of the eurozone, a Nobel prizewinner and the leading economist advising the Cypriot government said on Monday.

Christopher Pissarides, the head of the island's economic policy council, said that his government was pressured into accepting a deal at the last minute in Brussels on Sunday after a previous Eurogroup decision had thrown the island into chaos by shutting down its banks.

"The only good thing is that the uncertainty has been resolved. It's like saying I've got a pain in my leg, I go to the doctor, he cuts my leg off and we say: 'It's good that you don't have the uncertainly of that pain in your leg any more.' But you walk out without a leg," Pissarides told Bloomberg.

It's like saying I've got a pain in my leg, I go to the doctor, he cuts my leg off and we say it's good that you don't have the uncertainly of that pain in your leg any more. But you walk out without a leg – Christopher Pissarides

Pissarides, who shared the Nobel prize in economics in 2010, added that the Eurogroup's decision to heap a savings levy on private depositors was disastrous for two reasons, firstly because it made depositors pay for banking failures:

"Big banks in Britain, the United States and elsewhere ran into trouble – and depositors never suffered any losses. Depositors are losing confidence in their financial system," he said.

"If I was Spanish and had more than 100,000 euros in a bank, I would take the excess immediately and open up an account in another bank," he added.

Secondly, he continued, because it meant that Cyprus now had to rebuild its economy from scratch.

"Cyprus developed a small economy with a very highly educated labour force, probably the most highly educated labour force in Europe in terms of university degrees, concentrated on business services and financial services. Now, what do all those qualified people do? They become unemployed and leave the country."

He said that Germany's finance minister was now telling Cypriots that their country's economy was not a good model or economic development for them and that they now had to come up with an alternative.

The way Cyprus has been treated by larger European economies meant that it – and other smaller countries in the eurozone – would have to consider leaving the common currency.

"But once the dust settles down ... we should sit down and think very carefully on whether, in future, it is better to be within the eurozone or without. I also recommend that all small countries in particular and do their homework. Because as we have seen if you get in trouble, you are not necessarily going to be rescued in a way that benefits your economy," Pissarides said.

Luxembourg, with its bigger financial system, would need to ask itself what kind of help if could expect if it found itself in trouble, Pissarides told Bloomberg, as would Malta, which was following the Cypriot model.

Now that Cyprus was being told it was too small to be a financial centre, "we might as well have also our independent central bank deciding the policy best suited to our business model".

"The behaviour of the Eurogroup does not give you the impression, if not convince you, that here is a single unit of 17 partners that is trying to do its best for their continent and their currency," he said.

"It was more a case of 'Here's a little guy that misbehaved and we took him down.'"

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