The short answer is yes. The elections show that Bulgarians have lost all faith in a corrupt elite, and the next government — whatever shape it takes — is likely to be weak and unstable.

The previous Cabinet, led by Prime Minister Boyko Borissov, resigned after violent protests around the country. The immediate impetus for this outburst of public anger was high energy prices, but the subtext was disappointment.

Bulgaria has been, in many ways, a model of fiscal probity in recent years. The country’s public-debt burden and government deficit are among the lowest in the European Union. Growth has been modest but positive since the shock of 2008-2009. The unemployment rate is almost 12 percent, which compares favorably with most other southern EU countries.

At the same time, though, Bulgaria is the poorest EU member state, with an average monthly wage of only 400 euros ($519). There is widespread disappointment in the Balkan country that EU membership (Bulgaria joined in 2007) hasn’t noticeably improved living standards. As Ivan Krastev and Georgi Ganev argued on Bloomberg View last month, the austere safety-first economic policies that reassure wealthy Germans have the opposite effect on Bulgarians, for whom lack of change means continued poverty.

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The development does more to highlight the limits of the ECB’s powers than to demonstrate its boldness in dealing with the euro area’s economic slump.

The euro immediately slumped against the U.S. dollar after Draghi’s statement. This might have been his aim: A weaker currency can help euro-area countries trying to export their way out of the crisis. But it is also possible that Draghi was doing something unusual for a central banker: being candid about the tools under consideration for unblocking the flow of credit in the region.

Most of the euro area’s businesses are small and medium-sized enterprises, responsible for about 60 percent of gross value added and from 60 percent to 80 percent of employment in the European Union in 2012. In the few years leading up to the global financial crisis in 2008, borrowing costs for such businesses rose and fell roughly in line with the ECB’s short-term target interest rate and differed only slightly from one country to the next.

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The fever has already spread to the highest levels. At the International Monetary Fund’s recent spring meetings in Washington, IMF Managing Director Christine Lagarde and her deputy, David Lipton, repeatedly urged euro-area countries to focus on investment rather than budget cuts.

Then came the European Commission president, Jose Manuel Barroso, who said April 23 that austerity has reached the limits of political and social support. A day later, Italy’s prime minister designate, Enrico Letta, wasted no time declaring that “Europe’s policy of austerity is no longer sufficient.”

The argument is compelling: Less retrenchment will allow more money to feed into the economy, which should support domestic investment and consumption, and so stimulate growth. That in turn should reduce budget deficits by increasing tax revenue, creating a virtuous circle.

Yet easing austerity involves trade-offs that might not be worth making for the weaker euro-area economies. Paradoxically, it is healthier euro-area countries such as Germany, which aren’t considering a relaxation of austerity, that should do it.

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The fear that Slovenia might be the next Cyprus, with international creditors again forcing losses onto bank bondholders and uninsured depositors, is only partly justified. Slovenia isn’t Cyprus, and its rescue program, when it comes, will probably look like a hybrid between the Spanish-style bailout and the Cyprus-style bail-in.

First, the similarities: Like Cyprus, Slovenia has wrestled with a banking crisis for years and the big banks in both countries have made bad lending decisions. In Cyprus, that involved loading up on Greek government bonds that later had to be significantly written down. By the end of 2012, almost 27 percent of bank loans in Cyprus were nonperforming. Unfortunately, this was only slightly higher than in Slovenia, where nonperforming loans for the country’s three largest banks also rose quickly and surpassed 20 percent last year.

Slovenia’s bad loans were caused by a double-dip recession, a burst property bubble and poor corporate governance. The country’s three largest banks are all state-owned and the cozy relationship between politicians, banks and corporations resulted in many loans going to individuals and companies that were well-connected rather than well-qualified.

Crucial Differences
Yet there are crucial differences between the Cypriot and Slovenian cases. Cyprus’s banking sector was huge, accounting for more than 700 percent of the country’s gross domestic product by the end of 2012. By contrast, Slovenia’s banking sector is only 143 percent of GDP — much less than the 347 percent euro-area average.

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According to Schaeuble, the EU can’t make more progress towards setting up a banking union within the existing EU treaties. Germany says that a treaty change is needed to properly separate the banking supervision and monetary policy sides of the European Central Bank, once the ECB takes over supervisory duties for all 17 euro area countries.

The tenacity with which Germany is pursuing this seems odd, given that the U.K. just put bank supervision and monetary policy under the same roof, without feeling the need to build the kind of Chinese wall between the two functions that Germany is demanding. Schaeuble also says creating a pan-euro area bank resolution authority would require treaty change — yet the European Commission says that isn’t so, and the Commission is the official guardian of the EU’s treaties.

Germany’s insistence on a small treaty change is also odd, because it would open the door for the U.K. to pursue its agenda — which Germany says it is against — to start a wholesale renegotiation of the EU. Britain’s goal is to repatriate selected powers to national capitals, in particular London. Chancellor of the Exchequer George Osborne recently said the U.K. would use any renegotiation of the EU treaties to push this wider agenda.

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These findings are likely to incite a lot of resentment among German taxpayers, who will no doubt feel all the more strongly that they shouldn’t have to bailout other countries where households are even wealthier than theirs. So the study deserves some scrutiny.

The ECB’s researchers aimed to measure household wealth across the euro area and rank countries accordingly (they looked at 15 of the 17 euro area members, leaving out Ireland and Estonia). By looking at a variety of indicators such as home ownership, the ECB believes this study could help identify potential bubbles in euro area countries before those bubbles burst.

According to the report, Cypriot households are among the wealthiest in currency zone, with a median net wealth that’s 267,000 euros per household, second only to Luxembourg. German households recorded a median net wealth of only 51,400 euros per household, the lowest in the region.

There are a lot of problems with this point of view…

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It has been just weeks since the series of rollercoaster negotiations that produced a deal to support Cyprus, in the process devastating its banks and economic prospects. After the initial shock, the reality of the agreement’s implications is sinking in.

The answer to their question is that there may be another way: Leaving the euro would be a better option for Cyprus if — and only if — it can secure cooperation from its troika of creditors: the International Monetary Fund, the European Commission and the European Central Bank.

To figure out whether they should stay or go, the Republic of Cyprus’s 800,000 people and their leaders need to first conduct a simple cost-benefit analysis of whether euro-area membership is worth it.

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There may be one more piece of bad news to add to the pile before the week is out: Portugal’s budget for 2013 may fall apart, and with it the Portuguese government.

During his New Year’s Day address, Portuguese President Anibal Cavaco Silva called on the constitutional court to rule whether the budget, which consists of tax increases and spending cuts worth 5.3 billion euros ($6.8 billion), is legal.

If the court rules against the budget, an estimated 2 billion euros of the austerity measures may be compromised. This would immediately derail Portugal’s progress toward hitting its fiscal targets, only weeks after the country’s international creditors relaxed them. Rejection of the budget could also cause the government to collapse if the ruling Social Democratic Party cannot find alternative austerity measures to get Portugal back on track with its bailout program.

It is unclear exactly when the constitutional court will make its ruling, but it may be before the week is out. Concerns over what the court might say could account for an increase in Portuguese two-year bond yields to over 3.8 percent today, before falling back to around 3 percent again later in the day. This isn’t what a country looking to exit its bailout program and regain full market access needs.

The original of this piece was published on Bloomberg View.

This was always a false assumption, as events in Cyprus have made clear. There are significant limitations to the support the ECB is willing or able to offer, even to such a tiny island economy whose needs are easily affordable.

The ECB relies on two primary mechanisms to help euro-area countries in crisis. The first, emergency liquidity assistance, allows a country’s banks to access cheap funding from their national central bank, even when all they have left is low- quality collateral that doesn’t meet the criteria for the ECB’s standard liquidity operations. This emergency facility has helped a number of countries make it through liquidity squeezes over the past few years, keeping banks in Belgium, Greece and Ireland on life support since the beginning of the crisis in 2008.

The ECB has kept Cypriot banks alive in this way, too, providing about 9 billion euros ($11.6 billion) of financing to date. The ECB threatened to cut Cyprus off, however, if a bailout deal wasn’t agreed on with the so-called troika of international creditors — the ECB, the IMF and the European Commission — by March 26.

In response to the ECB’s threat, the Cypriot parliament passed a bill on March 22, allowing for capital controls. Emergency ECB funding would have plugged the gap in bank balance sheets created by deposit flight. Without this funding, deposit flight would have to be stemmed by force of law to prevent the island’s banks and economy from imploding. This is a serious line for a euro-area country to cross: Capital controls are legal under extraordinary circumstances, but they go against the notion of freedom of goods, labor and capital that is the principle tenet of the European currency union.

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Policy makers will have to come up with a new plan, and they had better hope the European Central Bank buys them enough time to do so before Cyprus’s financial system melts down.

A bank holiday was declared at least until tomorrow to prevent panicked savers from withdrawing their deposits from banks when they learned over the weekend that a levy may be imposed on deposits as part of a bailout program.

If depositors were worried about losing their savings before, they should be even more worried now. Last week, the ECB threatened to cut off emergency liquidity assistance to Cyprus’s two main banks in the absence of a bailout program. This would result in the immediate collapse of both banks, and they would default on their debt and most, if not all, of the 30 billion euros ($39 billion) in deposits they hold.

Faced with a bank run and the collapse of its largest financial institutions, Cyprus would only be able to rescue its banks and its economy by printing money and leaving the euro.

Luckily, this needn’t happen.

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