Israelis have always felt special affinity for Cyprus, a small neighboring island. Many of us go there often. Many of our business firms have stakes there for a plethora of commercial conveniences. Cyprus is almost our back yard, the only relatively close territory that is not inimical.Undersized as it is, Cyprus is also vulnerable. A substantial chunk of it has for decades been under Turkish occupation, an occupation that world opinion hardly appears to mind or so much as remember. Like much of southern Europe, Cyprus is in deep fiscal trouble and in urgent need of a bailout.Yet while its market is tiny in comparison to others (accounting for just 0.2 percent of Europe’s output) – or indeed perhaps precisely because of its diminutive size – the euro-zone powers-that-be tried to inflict the cruelest blow on it. They demanded hefty levies on all Cypriot bank deposits. This is not only draconian, it is unheard of in the free-market West.A dangerous precedent has been set by the very fact that Europe’s top financial authorities at all countenanced putting their collective hand into the savings of law-abiding depositors. Cypriot parliamentarians have reluctantly acquiesced to a modified version of this bailout precondition.Contrary to populist stirrings, the size of the account is beside the point. It is the principle that counts and the principle is identical whether a given account contains 1,000 or 100,000 euros. Legally held deposits are the fruits of someone’s labors and deserve to be inviolable.To arbitrarily take from them to cover a state’s collective shortfall violates inalienable rights to private property.Moreover, Europe’s new, dangerous standard grates against the code of “a penny saved, is a penny earned.” No matter how the regulators’ diktat is dressed up, it sought to punish those who behaved responsibly and did not squander profligately.This broadcast shrill warnings to investors far beyond the Cypriot setting, which includes foreigners with local accounts – plenty of Israelis, but hardly only they. Half of Cyprus’s depositors are offshore, mostly Russian.In the first cycle of those who needed to be acutely stressed, as they watched Cypriots rush in vain to ATMs to rescue a few euros from Brussels’ grasp, are the Greeks, Spaniards, Portuguese and Italians. But unease radiates farther yet.The slow-motion car crash instigated by the 2008 credit crunch still haunts Europe. It is trying to assure anxious investors that the euro zone’s breakup is not a foregone conclusion and that the compromised economies in the south are not lost basket cases. With one fell swoop of an incredibly ill-considered measure contemplated against its most defenseless member, however, Europe managed to unsettle the confidence in the existing order – both political and financial – of entrepreneurs and ordinary householders the world over.Anyone anywhere may be justified to feel that nothing is sacred anymore. The seemingly safest of banks cannot be trusted. Deposits are not safe. Bonds are subject to “haircuts.” This is a recipe for instability such as the world has not known for a very long time.We assume that nobody wants bank runs or a return to cash-under-the-floor-panels. Nonetheless, this irrationally harsh edict was not concocted in Nicosia and hence its fallout extends far outside the Mediterranean island that the European powers assumed they could kick around with impunity.Cyprus may be a no-account economy when viewed from Berlin, but the champions of economic union must recognize that they cannot have it both ways, that no economy is an island. In a union, even the smallest component counts. By proposing penalties directly on blameless individuals, Europe grossly crossed the line – not only morally but pragmatically.Old-time socialist remedies of reaching into the pockets of hapless citizens never worked but always demoralized. That free-enterprise Europe could have callously prescribed such bad medicine boggles the mind, and not only in regard to the obvious victimization of a small state (which should send shivers down Israeli spines).In this globalized era, no potential for a chain reaction can be smugly ignored. Supercilious Europe has set off a scary domino effect that we might all pay for.Israel is not immune.