Did Cyprus become an economic basket case because it is a tax haven, as some leftists have implied?
Did it get in trouble because the government overspent, which I have suggested?
The answers to those questions are “no” and “to some degree.”
The real problem, as I explain in this interview for Voice of America, is that Cypriot banks became insolvent because they made very poor investment decisions, particularly their purchases of Greek government bonds.
A few additional points.
1. The mess in Cyprus won’t cause problems in other nations, but it may lead investors in other nation to pay closer attention to whether there are problems with the government and/or banking sector.
2. There is not a “European problem” or “euro problem.” Some nations, such as Switzerland and Estonia, have made sound decisions. Others, such as Sweden, Denmark, and Germany, are in decent shape.
3. The final outcome in Cyprus was bad, but probably less bad than other options. The final result surely was better than the corrupt TARP regime in the United States.
4. It is utterly absurd to blame tax havens for the financial crisis. That disaster was caused by mistaken decisions by politicians in Washington.
So what happens now? I fear that Cyprus is going to be like Ireland, a nation that used to have a few attractive policies but now will have a bleak future.