Throughout Cyprus's financial crisis, German power has been on display. But Germany is pursuing the wrong objectives, showing how it's incapable of wielding its power correctly. Cypriot leaders came up with the idea to make their own small-scale savers liable for the bankruptcy of the banks - with the approval of Germany - because they wanted to hold true to their principles of crime and punishment.

All of Europe, indeed the entire world, took notice. Despite deposit insurance and Chancellor Angela Merkel's own promises, in the end it's the common people who suffer? The plan was withdrawn, and now the burden is falling mostly on wealthy Russians. But the damage is done, confidence undermined. What is the chancellor's word actually worth? Cyprus has shown once again that Europe can't rely on the Germans.

Fortunately the Euro Group has now made the right move. Those with smaller deposits are safe, one bank goes bankrupt and another is downsized. But the theatrics of the past week fit well into the image Europe is projecting right now: Irresponsible bankers gamble away the money of even richer money-launderers, and the politicians help both groups to save themselves as best they can - at the expense of the common people, who have neither the resources nor the influence to bring themselves to safety. And all of that takes place under German domination.

But this means nothing for the present. Just like twice before in our recent history, the Germans are falling deeper and deeper into conflict with their neighbors - regardless of the cost. It's a path that could easily lead to fear of German political hegemony on the Continent. Indeed, Merkel's idea of European integration is simply that Europe should bend to Germany's political will.

That decision, like the onerous bailout package for Cyprus announced early Monday, was sealed in Brussels in secretive emergency sessions in the dead of night in late October 2011. That was when the European Union, then struggling to contain a debt crisis in Greece, effectively planted a time bomb that would blow a big hole in Cyprus’s banking system — and set off a chain reaction of unintended and ever-escalating ugly consequences.

“It was 3 o’clock in the morning,” recalled Kikis Kazamias, Cyprus’s finance minister at the time. “I was not happy. Nobody was happy, but what could we do?” He was in Brussels as European leaders and the International Monetary Fund engineered a 50 percent write-down of Greek government bonds. This meant that those holding the bonds — notably the then-cash-rich banks of the Greek-speaking Republic of Cyprus — would lose at least half the money they thought they had. Eventual losses came close to 75 percent of the bonds’ face value.

The action had an anodyne name — private-sector involvement, or PSI — and, it seemed at the time, a worthy goal: forcing private investors to share some of the burden of shoring up Greece’s crumbling finances. “We Europeans showed tonight that we reached the right conclusions,” Chancellor Angela Merkel of Germany announced at the time. For Cypriot banks, particularly Laiki Bank, at the center of the current storm, however, these conclusions foretold a disaster: Altogether, they lost more than four billion euros, a huge amount in a country with a gross domestic product of just 18 billion euros. Laiki, also known as Cyprus Popular Bank, alone took a hit of 2.3 billion euros, according to its 2011 annual report.

“We are looking at a very grim future for Cyprus,” said Michael Olympios, chairman of the Cyprus Investor Association, a lobbying group. “Even firm believers in the European project like myself see now that it was a bad idea and that we should have at least stayed out of the euro.”

It's not just gold that governments can confiscate – pension assets can be in the firing line, although usually only in emerging markets and in extreme circumstances. In recent years, private pension schemes have been nationalised in Argentina and Hungary.

Could such a scenario happen today? It seems unlikely. In the Thirties, the dollar was pegged to gold and confiscation was simply quantitative easing by another name, while gold investment today is a global phenomenon, so policing any enforcement could be an onerous task.

The appeal of gold as a safe haven remains intact – we hold gold in some of our portfolios. It still plays an important role, given continuing currency devaluation, near-zero interest rates in developed economies and inflation risks. What's more, investors benefit from governments finding it easier to tax income on bonds and equities, rather than gold.

Dutch Finance Minister Jeroen Dijsselbloem is the president of the Eurogroup - an organization of eurozone finance ministers that was instrumental in putting together the Cyprus "deal" - and he has said publicly that what has just happened in Cyprus will serve as a blueprint for future bank bailouts.

What that means is that when the chips are down, they are going to come after YOUR money. So why should anyone put a large amount of money in the bank at this point? Perhaps you can make one or two percent on your money if you shop around for a really good deal, but there is also a chance that 40 percent (or more) of your money will be confiscated if the bank fails. And considering the fact that there are vast numbers of banks all over the United States and Europe that are teetering on the verge of insolvency, why would anyone want to take such a risk?

What the global elite have done is that they have messed around with the fundamental trust that people have in the banking system. In order for any financial system to work, people must have faith in the safety and security of that financial system. People put their money in the bank because they think that it will be safe there. If you take away that feeling of safety, you jeopardize the entire system.

The new policy will alarm hundreds of thousands of British expatriates who live and have transferred their savings, proceeds from house sales and other assets to eurozone bank accounts in countries such as France, Spain and Italy.

The euro fell on global markets after Jeroen Dijsselbloem, the Dutch chairman of the eurozone, told the FT and Reuters that the heavy losses inflicted on depositors in Cyprus would be the template for future banking crises across Europe. "If there is a risk in a bank, our first question should be 'Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself?'," he said.

"If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders." Ditching a three-year-old policy of protecting senior bondholders and large depositors, over €100,000, in banks, Mr Dijsselbloem argued that the lack of market contagion surrounding Cyprus showed that private investors could now be hit to pay for bad banking debts.

It is nothing of the sort. The deal to secure a €10 billion German bailout of the bankrupt Mediterranean island is one of the nastiest and most immoral political acts of modern times. It has struck fear into the hearts of hundreds of millions of European citizens, because it establishes a dire precedent. If democratically elected governments are willing to impose outright confiscation of up to 40 per cent of balances over €100,000 upon depositors in Cyprus, then why not another such hit tomorrow — in Spain, Italy or, most plausibly, Greece?

This is the most brutal display since 2008 of how far the euro-committed nations are willing to go to save the tottering single currency. It shows that the zone’s crisis will run and run, to the grievous disadvantage of almost everyone except the Germans. Berlin insisted upon a harsh line towards the Cypriots because they inhabit a small island with no political clout. Cypriot bankers have behaved with fantastic irresponsibility. They lent huge sums to Greece, and offered high interest rates to dirty money, with no questions asked.

Months ago, the Germans made it clear that they baulked at providing a cash lifeline to the Russian gangsters who have tried to take over Cyprus with a nod from their friends in the Kremlin. But hundreds of thousands of honest, decent citizens, including British residents, also had money in the island’s banks. They took it for granted that if Cyprus’s financial system was deemed worthy to be part of the eurozone, it must be as safe as the Bundesbank.

The Germans, who effectively control and bankroll the whole single-currency system, acted recklessly by signing on Cyprus — and Greece, Italy, Portugal, Spain and Ireland. None of these countries had economic convergence with northern Europe. But Berlin chose to pretend that they did, because it thus became enormously profitable for Germany to trade with them in an undervalued common currency rather than a sky-high Deutschmark. It always appeared absurd for the Germans, who — like the British — obey rules, pay taxes and tell the truth in financial documents, to form a financial union with the southern Europeans, who do none of those things, and are never likely to.

The advisers, known in Germany as the 'wise men', predicted the economy would almost grind to a halt this year, growing just 0.3 per cent compared to 0.7 per cent in 2012. In October they had forecast Europe's largest economy to expand 0.8 per cent in 2013, but data has since shown that it shrank by 0.6 per cent in the last three months of 2012.

Foreign trade, traditionally the main driver of German growth, would subtract 0.3 percentage points from German gross domestic product (GDP) this year, the advisers said. Demand for Germany's goods has weakened as austerity measures and recession take their toll on demand in other members of the euro zone, where Germany sends 40 per cent of its shipments. The advisers said investment was unlikely to make any significant contribution to growth in the first half of 2013.

The cash-strapped island nation needs a 10 billion euro (£8.5 billion) rescue package to recapitalise its ailing lenders and keep the government afloat. But savers with more than £85,000 in its banks will lose up to 40 per cent of their cash as one of several draconian measures imposed by Brussels to stop the country going bust. Russian investors have around 20 billion euros in Cyprus, and would be particularly hard hit, prompting speculation they could pull out their money.

'In my view, the stealing of what has already been stolen continues,' furious Russian Prime Minister Dmitry Medvedev was quoted by news agencies as telling a meeting of government officials. The Kremlin warned it could retaliate by ‘punishing’ European businesses if the EU imposes a bank levy. Andrew Nekrassov, a former government adviser, added: ‘There are a number of large German companies operating in Russia. You could look at freezing assets.’