A former governor of the Central Bank of Cyprus on Friday accused the EU of "blackmail" in its bailout plan for Cyprus and said its approach to the crisis put the entire European project at risk.
Athanasios Orphanides, who led the central bank from 2007-2012 and now lectures at the Massachusetts Institute of Technology, faulted the government in Nicosia for lacking the political courage to act two years ago to address its problems.
But the US-trained economist said the requirement for Cyprus to impose a hefty tax on bank depositors as a part of the 10 billion euro ($13 billion) EU-IMF rescue proposed last week was aimed at wrecking the economy of the Mediterranean island-state.
"I believe blackmail is the accurate description of this unfortunate event," he told AFP in an interview.
The Cyprus government "is trying very hard to find additional resources so a program could be agreed with the European governments in good faith."
Instead, he said, the proposed bailout was structured in a way that undermined the Cypriot economy's strength as a tax haven.
"The concern is that whatever the Cypriot government comes up with, other governments reject it, unless they are certain that the economic model of the island is destroyed," he said.
"At least that is the message from Europe over the past couple of days."
The deposit tax was required as part of the rescue crafted by the European Union and International Monetary Fund last weekend.
As initially proposed, the depositors would be hit with a one-time 6.75-9.9 percent tax to help stabilize government finances.
The tax sparked an uproar from Nicosia to Russia, the source of billions of euros stored in Cypriot banks, and Cyprus legislators overwhelmingly rejected the proposal.
But by late Friday, without a comprehensive alternative plan, and Cyprus's banking sector facing a meltdown, it appeared that it was back up for reconsideration, though possibly focused only on large depositors and possibly a much larger hit.
Orphanides suggested that by pushing the tax, Europe's economic powers were going too far and weakening the glue that holds the eurozone and European Union together.
"In a series of mistakes we have seen in the handling of the crisis over the past three years, last week's blunder is the gravest of all. It compromised the sanctity of small deposits throughout Europe," he said.
"When governments in some of the larger European member states start blackmailing the government of one small member state to confiscate deposits, the question is, who's next?"
At a deeper level, Orphanides said, European institutions "have broken down the notions of mutual respect and solidarity," leaving the economist pessimistic about the future of the European Union.
"We could have built a deeper European Union, which is how we could all prosper. It is so sad that so many European officials are contributing to European disintegration instead."