Euro insecurity yet again

Just when we thought the Euro was safe along comes the tiny island and economy of Cyprus. I am not entirely sure as to why Cyprus has attracted such a large bolus of assets in its banks, whose assets dwarf the size of the economy of the island. Perhaps it has to do with the absurd rates of return promised on capital parked there. The Cypriot economy is just 02% of the Euro zone total but the timing is clear. At this point in time the Germans are not willing to bail out their southern European partners. While there are predictions of dire consequences, there appears to be little support among the Germans to continue bailouts of their spendthrift southern partners without extraction of some sort of penalty.

I see potential future parallels in the United States. Certain states, most notably the state of Illinois, have been blatantly irresponsible in terms of managing their own financial affairs. They have played all sorts of games with budgeting, pensions, and stiffing creditors. I can only imagine that their trump card is to assume they will be bailed out by the Federal government. They are no alone in their shenanigans and they are being encouraged in some sense by the Federal government to engage in such budgetary idiocy. In the short term being financially conservative at the state level appears to be operating not in the best interest of the citizens of the state. The Federal government provides financial inducements to spend money no one has but at least in the short term when other states accept the funds hurts no one except those who don't play along.

I suspect that the game looked just like this in southern Europe in the early 2000's. Get easy money from the EU, play fast and loose with internal budgets, and the hell with financial discipline. However, you cannot create real wealth and real productivity with irresponsible spending, poor investment, and fiat currencies. It may look good for a while but inevitably the party comes to an end.

No one is great at prediction in the short term. The world is so complex and interdependent that that moment to moment predictions are impossible. I cannot imagine that the fate of the world's economy hinges upon tiny Cyprus. However, I can imagine that the Euro could become unwound based upon this crisis. The Germans should stick to their guns as should the Cypriots. Cypriot banks can go under, the Russians will take a haircut and someone will come in and buy up the pieces.