Short term the Government will be shut out of capital markets, leave the euro and revert to the Cyprus £ - which was stronger than GBP before they joined the euro. The value of Cyprus Pounds would be significantly lower than the current euro (reflecting the country's economic weakness) and imports would be more expensive. The flip side of that is Cyprus instantly becoming the cheapest holiday destination in Europe and if Iceland's experience is anything to go by they would soon be on the road to a real economic recovery. They would control their own currency which would float at a level suitable for the national economy and (big bonus) could also put their worst offending bankers in jail.. Longer term Cyprus has gas reserves to be exploited that will make the island very rich indeed, but for 18 months to 2 years it would be tough. The alternative is permanent dependence on the EU and being drip fed life support from Brussels/Berlin while the people are slowly reduced to penury - I call that the Goldman Sachs Model.
The consequences for the EU however would be significant. Although Cyprus is only 0.2% of the EU economy, it would demonstrate that the single currency is reversible. That in turn would hit investor confidence in the survivability of the euro as a currency and the eurozone more broadly. Why? Should Cyprus leave then would the people of Greece, Spain, Portugal and Italy continue to accept the grinding austerity that is destroying their countries, or think "sod this, if Cyprus can do it so can we"? The danger then is that the whole EZ (and with it the EU as currently formed) would begin to unravel. Seen from Brussels the existential danger is a country leaving the euro/EU and making a success of that exit.
Thanks for a great reply, I think I know what path i'd prefer as a Cypriot! I'm sure if this was put to the people then they would also chose a short term loss in favour of gaining more control and building their own future
I am a supporter of the EU and believe working together benefits everyone, but there is a difference between working together and being together