“If the Euro is really meant to survive, creating a banking union in the foreseeable future is vital, with a centralized supervisory board and a centralized restructuring authority that can intervene everywhere and that can restructure banks. If that had existed, we would never have had the Cypriot problem” said economist Guntram Wolff.

He added that in the short and medium term “we will have to bite the bullet if we want to hold the Euro together and the European Central Bank should be told that it must provide unlimited liquidity to maintain the payment system. If the ECB no longer does that, Cyprus is de facto out of the Euro zone”.

The Deputy Director of the Bruegel think-tank said that the Cyprus situation was the victim of two great mistakes.

The first was the initial decision to tax deposits of up to 100,000 Euros, without debiting senior creditors, which would have created a totally biased system plus threatening confidence in all EU bank deposits.

“The negotiating partners on both sides all sat down together and discussed the matter and European partners did not veto the plan to tax deposits of less than 100,000 Euros, so they are partly responsible. They should have made it clear that the move not only threatens confidence in deposits in Cyprus, but confidence in all deposits”, points out Wolff.

The second very grave mistake was the option to introduce capital controls.

“A currency zone with capital controls is no longer a currency zone. It would be an explosive situation indeed if the markets had the impression that capital transactions controls can be introduced. A bank run could hardly be prevented and in that case, the house of cards could collapse”.

Wolff was politely critical of Jeroen Dijsselbloem, currently president of the Eurogroup and president of the Board of Governors of the European Stability Mechanism who allegedly suggested the Cypriot bailout deal forcing losses on big depositors at the country's two largest lenders “could become a model for future European bank rescue packages” which immediately upset investors and triggered a stock market slump.

“No one knows for sure what Mr Dijsselbloem did or did not say, and how far he was or was not misquoted, but the fact is that players on the financial markets had a strong reaction. Twenty-four hours after his remark, banks' equity prices had dropped by more than 25 billion Euros in the Euro zone which means the remark had very negative and harmful consequences for the European banking sector”, pointed out the German economist.

“In my opinion Cyprus is currently in an extremely dangerous phase. There is a significant risk that Cyprus will exit the Euro zone. In this situation, any unfortunate remark can add fuel to the flames” warned Wolff.

However it will be necessary to get the banks more involved since “using taxpayers’ money to help out banks throughout Europe is impossible and so there is some truth to the plan that banks must be more involved”.

Said this suggesting that deposits could generally be debited to pay off debt is not something that was agreed on as a role model for all of Europe nor would it make sense. “Right now, we are looking at a highly dangerous tightrope walk. I do not believe there was a political consensus to say something like that”.

Finally the Bruegel think-tank official argues that the 0.75% the ECB charges on loans is the lowest in the institution’s history, yet it is still the highest among the world's major central banks.

“The ECB has been much less aggressive in its response to the global economic crisis than the central banks of Japan, the United States and the United Kingdom. They have all undertaken massive asset-purchasing programs and lowered their key interest rates closer to zero percent”.

A cut to the interest rate could theoretically stimulate economic growth, but it also risks increasing inflation - something the Euro zone could perhaps afford to do, but which on a larger scale would go against the ECB stated mission of maintaining price stability.

Thursday's ECB monthly meeting was the first since Cyprus was forced to accept an emergency loan package from the EU, ECB and IMF. The most controversial condition for the bailout, an unprecedented tax on bank deposits, led to fears of a loss of confidence in Euro zone banks.

The interest rate decision also follows two important economic indicators in Europe: inflation and unemployment. Figures released on Wednesday showed that inflation in the Euro zone is well within the ECB target range of just below 2%.

Data on Tuesday showed unemployment across the currency union had hit a record high in February of 12%.

MercoPress