Cyprus bank crisis: the legacy

Students marched in Nicosia with the banner "people united never divided"

Today about 1,500 students marched to parliament in Nicosia. They believe the bailout deal robs them of a future.

Their angry chants were directed at the troika, the EU and in particular Germany's Angela Merkel. There were banners linking Mrs Merkel to Hitler. Outside parliament they shouted "Merkel is a whore!" Such a scene would have been unimaginable in Europe only a short while ago.

The eurozone crisis has soured relations between Germany and southern Europe. I have heard anti-German rhetoric in Italy, Spain, Greece and Cyprus.

The currency intended to bind Germany into Europe has ended up sowing division.

Germany did not, I believe, seek a leadership role in Europe. Its economy, however, has made it Europe's indispensable power. In order to keep the eurozone together Berlin has prescribed its medicine - cuts to the deficit and structural reforms that are intended to usher in growth later. To survive in the eurozone these mainly southern European countries are being told to regain competitiveness by cutting wages and benefits.

The ultimate test for the eurozone is whether this strategy will work. The German Finance Minister, Wolfgang Schaeuble, told the Athens daily Ta Nea that he believed the austerity measures were not just working but making up for decades of policy lapses.

Bleak future

If growth returns and if these "Club Med" economies spring back to life then all will be forgiven. But if the future is hardship, job losses and recession then ultimately the European project itself will be challenged. Today students were saying the EU had robbed them of their future.

As each day passes the Cypriot economy declines. This was a working day, but the centre of the capital Nicosia was a ghost town. There are figures (unsourced) that the economy has lost 2bn euros (£1.7bn; $2.6bn) in the past 10 days alone. No deals are being done, no investment plans are being made.

One of the local papers mocked President Nicos Anastasiades, who had spoken of "the best possible deal". The paper said "the best possible deal will push us into a prolonged slump, that will shrink the economy beyond recognition". That is the prevailing view: that the medicine prescribed by the Eurogroup - the eurozone finance ministers - will kill the patient.

Not surprisingly today the Cyprus Finance Minister Michalis Sarris said the country was facing an "emergency". They are struggling to put in place capital controls to prevent a bank run when the banks reopen, possibly on Thursday. They are still working on the details of the plan. There is likely to be a limit on withdrawals and a limit on the export of euros.

Although it is not clear why, the Chairman of the Bank of Cyprus, Andreas Artemis, resigned today.

All of this is having a devastating effect on the economy. Those with large deposits in the banks (above 100,000 euros) do not know the scale of their losses - but the expectation is 40%.

Europe seems uncertain whether forcing depositors to take a "haircut" is a one-off or the model they will use in the future. Jeroen Dijsselbloem, the head of the Eurogroup, spooked the markets by implying the Cyprus bailout was the template. Today a board member at the European Central Bank, Ewald Nowotny, challenged that view by saying the Cypriot banking crisis was a special case and not a model for the future.

Cyprus has exposed the insecurity of Europe's leaders about their currency's future.