By Timothy Spyrou
IN DESPERATE economic and political times, people look for easy solutions because they are afraid, angry, confused and dislocated. It is in atmospheres like this where populists win the most ground. Populism by its very definition offers easy solutions in the name of ‘the people’. However, because populist solutions often involve a lack of foresight and practicality, they could, if implemented, cause an outright collapse in quality of life, economic prospects and political stability.
It is in this vein that I am attempting to rebut the arguments for partially exiting the eurozone on a temporary basis, as laid out by Professor Andreas Theophanous in his paper. His proposal to circulate an Alternative Cyprus Pound alongside the euro will certainly alienate eurozone partners for economic and political reasons.
If applied, it will complicate things for Cypriot borrowers, savers and the banking sector as a whole. Furthermore, the suggested breathing space to build a responsive, meritocratic, socially enterprising, economy, society and state will instead be used by vested interests as an opportunity for them to preserve their complacency culture. Lastly, incomes control policy has been tried before in America and Britain and has failed spectacularly in achieving consensus and results.
Asking our European partners for special permission to partially exit the eurozone so we could circulate the ALTCYP alongside the euro seems highly impractical. It would require a treaty change within the eurozone and maybe within the entire EU.
Part of the problem with European integration is the perpetual tinkering of institutions and treaty changes to suit individual members or groups of members. Even big countries like Britain face pushback when they demand changes to suit their interests. Northern European creditors will definitely oppose the proposal.
Other bailed out countries will also object, after having to impose painful austerity and structural reforms in a draconian manner with little time, warning or funds for citizens to adjust. Does the gentleman honestly believe that Greece, a country that has not only see its quality of life fall dramatically, but also a near collapse in political stability, will gladly accept Cyprus not following the rules?
Does he honestly believe that the Irish, after experiencing the near death of the Celtic tiger, will tolerate Cyprus receiving favourable treatment? We will be accused of unpardonable arrogance, and our increased isolation within the EU may lead to our expulsion.
The idea of an alternative currency circulating alongside the main one is not completely outlandish, as an earlier letter writer noted when mentioning the Bristol Pound. However, we must look at things in their proper context.
The Bristol Pound equals Sterling because Bristol is a city that is part of the nation-state and political economy that is Britain. Cyprus is a member of a Europe wide currency union whose countries have yet to economically converge. The ALTCYP will fall from our old European Exchange Rate Mechanism value by at least 15% to 20%. It may make our tourism product slightly more competitive [not taking into account the fact our tourism product has largely stagnated] and boost some exports but, by increasing the price of imports, we would only be widening our trade deficit.
Furthermore, the idea that bank deposits would remain in euros while loans would be converted into ALTCY£ doesn’t make sense. Any gain to depositors from having assets denominated in stronger euros vis-à-vis the ALTCYP will not be worth the potential trouble.
Borrowers, seeing the real value of their debt increase against any assets, will be paying in a devalued currency to banks where the assets of creditors are denominated in euros. The closest comparison would be the case of Hungary, where up to 60% of its people’s debts were denominated in euros and Swiss francs. Some households and firms will go bankrupt and more foreclosures will loom.
Upon further scrutiny, the gentleman’s proposal will further damage the shaky foundations of the Cypriot financial sector. A household or firm will be paying back loans in devalued ALTCY£s to a bank whose capital requirements and deposits are denominated in euros!
On top of the increase in bad loans, banks will be making losses [in euro terms] on the loans that are being paid. Such a scenario would inevitably injure depositors. The accumulated losses may force the remaining banks to collapse. Capital controls will be extended for years to avoid this threat.
It will deter any foreign investment, regardless of whether they are individuals, enterprises or institutional investors.
The only conceivable way this plan could actually work is if there is a further restructuring of the sector, by splitting up all the banks into ALTCY£ based and euro based institutions, which will require even more bailout aid from the Troika. I doubt that Wolfgang Schauble would welcome this proposal since he did all he could to avoid directly bailing out Cypriot banks in the first place.
The professor also said that Cyprus will, re-enter the eurozone once all of the structural problems are sorted out. To be honest, this would guarantee continued economic stagnation. Vested interests such as the civil servants’ trade unions and the state owned monopolies will use the breathing space as an opportunity to fight their corner aggressively, making change harder.
It will also act as a disincentive to diversify away from our tax haven economic model. If we want to be encourage the growth of new industries that offer better opportunities for sustainable growth through entrepreneurship, this will merely delay the process. We want our youngsters to apply knowledge, arts based creativity, and scientific and technological innovation so that years from now, Cyprus could see this period as the beginning of a new foundation.
Our state needs to ditch the outlook of “clientelism, complacency, and cronyism” and instead look for an entrepreneurial ecosystem of “innovation, creativity, progress and leadership.” We need to eliminate fiascos like the endless vested interest squabbling that plagued the LNG terminal and natural gas power plant conversion issues for a decade.
Furthermore, if the EU thought introducing alternative currencies within the troubled members of the Eurozone was a good idea, why wasn’t it tried? The reason why is that it wouldn’t work in an environment where special interest reigns, regardless of whether you have a right wing Berlusconi government in Italy or a left leaning electorate that, rejects the moderate son because it longs for the for the demagogic excesses and corruption of the father, the late Andreas Papandreou.
As for incomes control, the two most notable applications of this policy were in America under Nixon and the UK under Prime Minister’s Heath, Wilson and Callaghan. Instead of controlling inflation, and avoiding social conflict, these policies created “strife”.
Nixon’s wage and price controls were supposed to last 90 days. Instead, they lasted nearly a 1000. When they were finally removed because goods were disappearing from the shelves into the black market or non-existence, prices shot up through the roof, undermining the presidencies of Ford and Carter. In Britain, instead of controlling inflation, and avoiding social conflict, these policies exacerbated both.
“Labour wasn’t working”, as Labour leaders Wilson and Callaghan were being overwhelmed by the striking labour unions. The Cypriot unions are at least as intransigent as the British unions during the Winter of Discontent preceding the 1979 general election. An incomes and prices control policy would be an excellent opportunity for the Cypriot public sector unions, followed by AKEL and co, to cause further chaos.
If they refused to give up the COLA and 13th salaries in the face of penalising the unemployed and small businesses and they voted no to the initial deposit tax in the face of economic D-Day, then they are capable of any act of lunacy. The only workers who will be complying with the incomes policy will be the private sector workers.
I do not claim to be a public policy master. However, when I think that commonsense is endangered by populism, I speak up. The proposal offered by the gentleman doesn’t pass the commonsense test by any measure, as I have demonstrated above, hopefully successfully. It has potential only to backfire spectacularly. In conclusion, paraphrasing Margaret Thatcher, “this is no alternative.”