The Cypriot financial crisis through a Post Keynesian lens

The Cypriot Financial Crisis (CFC) revealed significant flaws regarding the neoclassical conditionalities imposed by the Troika (European Commision, European Central Banks and the International Monetary Fund) through the Economic Adjustment Program, particularly the austerity measures, internal devaluation, and market-oriented reforms. These policies led to wage cuts, higher taxes, and labor market deregulation, deepening the recession and increasing inequality. The controversial bail-in plan, aimed at avoiding moral hazard, with depositors bearing the burden of bank recapitalization, worsened the economic and social turmoil. Post Keynesian economics offers a contrasting approach, advocating expansionary anti-cyclical fiscal policies, public investment, and progressive taxation to stimulate aggregate demand and achieve full employment, countering the recessionary effects of the Cypriot crisis. In contrast to Troika’s austerity-driven framework, Post Keynesians emphasize the role of the state in counteracting extensive market failures and ensuring financial stability. They propose a bailout in the context of European solidarity, with the European Central Bank acting as the lender of last resort, instead of the socially damaging bail-in. The paper examines the CFC through key political economy components—economic theory, political framework, ideological structure, institutional structure, and initial conditions—providing a holistic understanding. This perspective promotes long-term reforms focusing on sustainable growth with equitable income distribution, countering the recessionary neoclassical measures embedded in the Cypriot EAP.