Cyprus last government is a perfect example of the latter. Its banks were heavily invested in Greece, so when the hair cut happened, they were hit hard. The goverment then decided that the state should take over a bank and help others. Which, whith a banking sector 8 times its GDP lead to large increases to it's own debt.
Ireland experiencing a seemingly similar situation, let the government at that time assume, that Cyprus would recieve a comparable bail-out. So it chose a plan, that already had not worked out well for the other devided European island. Still, it would have been acceptable.
Germany, sick and tired of rescues, with a Euro-sceptic party forming, and elections around a corner; just could not tolerate the fact that the bail-out would help Russian oligarchs.So it decided to force a levy on the deposits.
Cyprus new Government is a perfect example of the former. The newly elected government first agreed to the demands, then found out it could not get enough votes in the parliament. So it just could not come to any decision anymore. Then Friday night decided on something, which will likely not be accepted.
There are only two options (a bank run will happen in either case - capital controls never help):
1) accept the plan, loose large parts of the banking sector, face a depression, stay in the Euro, don't recover
2) decide against it, loose large parts of the banking sector, face a depression, leave the Euro, recover
It is binary and simple, with one comparable example each. Ireland for number one and Iceland for two. The Irish debt to GDP ratio will pass 120 %, its economy can be described with the letter L, unemployment is at 14 %. Iceland will approach full employment in a year, its debt will stay under 100 %, the GDP is growing. The economy, banking sector, and government debt will have to be restructured anyways, either under the German plan to cause pain or on Cyprus' own terms. Still Cyprus is unable to decide.
The US managed to both with the sequester mess. "Hey, let's come up with a plan that is so damaging, that neither party can accept it."And then, of course, they were unable to make any other decision.
But we aren't any better. Germany needs the Euro for the export focussed economy, still the country is unable to decide on anything until it is
How is this even possible? Have we all gone mad?