The Assyrians first took the island in 721 BC from the primitive hunter gatherers, and then the Egyptians in 570 BC then later on by the Persians around 545 BC. After a long succession of civilisations over history the tiny little island is still divided and now claimed by the modern Greeks after their attempt of mass genocide in 1964 and 1974 on the minority 18% Muslim population subsequently thwarted by the UN and Turkish army.
There has never been a nation or civilisation that has managed to hold on to the islands indefinitely and this is why its sheer volatility within the region is an important factor for the eurozone currency and ultimately the world economy.
The EU led by Germany has asked for a bank levy on the crooked Greek Cypriot banks brimming with laundered cash from the Russian Mafiosi. The Troika thought they would have their pound of flesh via a 10% forced taxation on all bank accounts, but they underestimated the nature of the Greek Cypriots, who do not like to pay tax let alone a levy on their savings. Furthermore, by crossing the Russian mafia, you will incur the wrath of Putin and his network of Russki thugs and hit men. Does the EU need the hassle of this hornets nest? Better for Merkel to drop this one like a hot potato, take the loss and move on.
The only slight drawback to dropping Southern Cyprus from the eurozone would be Greece maybe causing a scene. This may be a good excuse to drop them as well and cut the losses there. As for Italy and Spain, it would be better for the ECB and Merkel to put all their efforts into keeping them in the EU and not waste anymore precious euros on the profligate states who are just a cash black hole with no industry or will to cooperate.