[AMERICAN] 1. Joining the euro was a tragic mistake.

Before joining the euro, Cyprus should have considered that its banking- and tourism-based economy had nothing in common with the rest of the European economy. It should also have recognized that if its economy got hit by a major negative external shock, Cyprus would not be supported by fiscal transfers from the European Union or by lower European Central Bank (ECB) interest rates. Cyprus is now paying a very high price for this mistake, as its economy is likely to contract by at least 25 percent over the next year.

2. Allowing unregulated banks to grow so large was a blunder.

It is bad enough that light regulation of the Cypriot banking system allowed that system to grow to more than seven times the size of the Cypriot economy, mainly due to large Russian deposit inflows. However, it is unconscionable that the bank regulators allowed Cypriot banks to buy Greek government bonds amounting to 150 percent of the size of Cyprus's GDP. This combination was an accident waiting to happen -- and it did happen when the Greek government defaulted on its bonds in 2012. The net result was bank losses close to €10 billion, or 60 percent of Cyprus's GDP.

3. Trying to tax small insured depositors was a monumental error.

The Cypriot government's proposal to impose a 6.75 percent tax on small insured bank deposits was a huge economic and political blunder. Although the proposal was eventually withdrawn, it had a very large impact on consumer confidence. It had an even greater cost for the new government's credibility and popularity, considering that the proposal would have potentially impacted 90 percent of the Cypriot population.

4. Basic restructuring and large fiscal tightening are not possible within the euro straitjacket.

By requiring a large write-down of the biggest Russian deposits at Cypriot banks, the IMF-EU bailout package has totally destroyed the bank business model on which the Cypriot economy was based. At the same time, the IMF-EU bailout program is compounding the major supply-side shock to the Cypriot economy by requiring that Cyprus adopt budget cutting measures totaling 7.25 percent of GDP over the next three years. The basic lesson that Cyprus is about to learn is that an economy cannot be radically transformed away from banking and toward tourism in a euro straitjacket without destroying the domestic economy. This is particularly the case when an economy is also being subjected to massive cuts in the government's budget without the benefit of a cheaper currency to boost the tourism and export sectors.

5. Cyprus missed a good opportunity to leave the euro.

Countries in a currency union generally shy away from reintroducing their own currency for fear of precipitating a bank collapse and of being forced to impose stringent capital controls. This makes it all the more difficult to understand why Cyprus has delayed the inevitable reintroduction of its own currency. After all, its IMF-EU-induced banking fiasco has already resulted in a two-week bank holiday and the imposition of capital controls. Cyprus should have at least gotten the benefit of a new currency out of this fiasco.