The scenes of panic at ATM machines in Cyprus and the continuing potential for a complete meltdown of the banking system there should give some pause to those in Ireland who have been so dismissive of the various steps taken here since 2008 to prevent a banking collapse.

The Irish politicians and pundits who denounced the bailout at every step and called on the Government to defy the Europe an Central Bank are now seeing what can happen to a small country whose politicians engage in populist posturing instead of facing up to responsibilities.

While the EU authorities made a serious mistake in agreeing to the initial botched attempt to impose losses on small bank depositors in Cyprus, there is no escaping the fact that serious losses will be suffered by big depositors in the island’s banks. And if the crisis is not resolved in an orderly fashion, all depositors – big and small – could see their savings washed away in a banking collapse.

It is worth recalling that on the night of September 29th, 2008, when the Fianna Fáil-Green Party government took the decision to guarantee all deposits and most of the liabilities of Irish-owned banks, this country was on the verge of a situation akin to that in Cyprus.

Scaremongering
After days of scaremongering by some high-profile broadcasters there were fears that panic was about to break out. One of the things the Government considered on the night of the guarantee was the kind of security response that might be required if disorderly crowds began to gather at banks and ATM machines trying to withdraw their money the following morning.

Thankfully that didn’t happen but it was probably a close-run thing. The independent banking inquiry that reported in March 2011 pointed out that all of the possible policy alternatives facing the Government in September 2008 were fraught with risk and the time for decision-making was very short. “Increasingly the main issue at hand was seen as ensuring market financing for the banks at the beginning of the next day; making sure that Ireland was open for business in the morning . . . It represented on balance the ‘least bad’ option to address the immediate problem.”

Of course that is not the conventional wisdom and the bank guarantee is dismissed by many, including the present parties of government, as the source of the country's problems rather than a response to them. That should prompt some reflection all around. The Irish presidency of the EU has not covered itself in glory in the way it has responded to the crisis in Cyprus. Minister for Finance Michael Noonan didn't point out the dangers of allowing small depositors to suffer and, like his EU colleagues, endorsed the plan devised by the Cypriot president Nicos Anastasiades to minimise the impact on large deposits.

To be fair the EU authorities wanted to protect the savers with deposits of €100,000 or less but they allowed the Cypriot government to try to protect the big fish at the expense of smaller depositors. That discredited the initial bailout attempt with potential knock-on effects for other EU peripheral countries.

Maybe one of the reasons Noonan didn’t spot the danger is that he instigated a raid on the savings of Irish people through the pension fund levy imposed shortly after the Fine Gael-Labour coalition took office. A reason for the depth of public anger at the lucrative pensions paid to retired Irish politicians and senior public servants is the fact that people who saved for their own pensions have had to absorb that loss on savings they and their employers had put aside.

Of course the usual suspects from the far left and far right, who have attacked every effort to get this country back on a sound financial footing, were quickly off the mark to make political capital out of the initial botched attempt to impose some losses on Cypriot depositors.

Magic formula
The unfolding events in Cyprus should expose the hollowness of the argument that there is some magic formula for saving bust banks and protecting depositors without anybody having to take any kind of loss.

The Cyprus experience should also serve as a reality check for those who may be swayed into believing that the EU and its institutions are the enemy. Many Cypriots who harboured the belief that Russia, with whom they have strong religious, cultural and economic ties, would step in to save them from the EU bailout terms have had a rude awakening.

The Germans, for their part, are not prepared to provide unconditional aid without some pain being felt by irresponsible locals, be they Cypriot or Irish.

In some ways the crisis, with German/Russian rivalry at its core, evokes memories of 19th-century great power manoeuvres. Josef Joffe, the editor of leading German newspaper Die Zeit , warned jocosely yesterday that we should watch the Bosphorus for approaching Russian warships.

More seriously he spoke of the anger of German citizens about being vilified as “latter-day Nazis” for imposing what they regard as reasonable conditions for each successive bailout. Yet he also put the Cypriot problem and the entire euro zone crisis in its proper historical perspective.

“Tabloid attacks on Berlin, evoking yesterday’s demons, are off the mark. For the biggest game has changed. There is a world of difference between the Europe of Kaiser Wilhelm and Frau Merkel, between Panzer armies and currency reserves. Compared to the last 500 years, this is sheer bliss – give or take a few haircuts.”

That is the nub of the issue.

For all its muddling, the EU and its institutions have made Europe a far better place than at any time in its history and whatever way it plays out, the crisis in Cyprus won’t change that.