I have noticed that a number of commentators have misunderstood my position on the Cyprus debacle and, more generally, on the question of how failed banks ought to be dealt with. As I made clear yesterday, I am all for bailing in the creditors, even the uninsured depositors, of failed banks. In fact I have been arguing this case for three years (see for example our Modest Proposal) so as to avoid the zombification of Europe’s financial system. BUT, I have also insisted that this must be accomplished centrally, by an ESM which, in collaboration with the ECB, takes equity in the failed banks, shrinks them appropriately, recapitalises the viable parts and then sells off the latter to private investors at a profit (TARP and Sweden circa 1992-like). The idea that different banks should be treated differently depending on the strength of the state (e.g. SNS Reaal as opposed to the Bank of Cyprus) in which they are domiciled is inconsistent with the notion of a currency union. And, to boot, it will more likely than not to lead to capital controls and the gradual dissolution of the Eurozone.