Cyprus Mail
Guest Columnist Opinion

Cyprus tells a tale of the unexpected

By Andrew Shouler

It was once said (and is regularly repeated) that a week is a long time in politics. As events both on the island and elsewhere have regularly shown, even within 24 hours much can happen to jolt the attention. Any given incident can naturally be immediate news with the power to change either the reality on the ground or any understanding of it.

For the economy, though, a week is barely a moment. Changing trends, or what people generally feel, in normal circumstances requires not only decisions but plenty of time, especially when a set of policies has to be enacted whose effects on the relevant statistical data will be delayed, even if everyone’s attitudes and behaviour react promptly.

Three years ago, I was one of those perturbed and outraged by the EU’s imposition upon Cyprus of very tough terms in exchange for bailout monies, a package amounting to 10 billion euros, which in fact was to involve ‘bail-in’ funds extracted from depositors’ bank accounts. That severe haircut was a chastisement for past policies and administrative conduct.

The Eurogroup of creditors insisted on stinging conditions, tired of supporting debtor members on its southern periphery. The so-called core countries in northern Europe wanted to shatter the assumption that government and taxpayers would always pay the price of others’ irresponsible financial excess, equally seeking to safeguard the credibility of the euro as a cohesive currency.

That’s another matter in itself, but there’s no doubting that a touchpaper of concern was lit at the time, which swept Europe. This unprecedented official dipping into the savings of bank account holders was shocking, particularly with doubts already circulating as to whether the euro itself was actually a manageable project or intrinsically dysfunctional.

Last week, however, technically Cyprus left the package and its requirements behind, as confirmed by the March Eurogroup meeting, a feat overshadowed by talk then of Brexit and the migration crisis. And while policy-related tensions and protests naturally continue, the interested observer is likely to notice the relative ease that prevails again now.

Not only that, but those key economic data are seen to have responded pretty well to what was routinely described as an austerity programme, one that was bound to entail retrenchment and recession for some considerable while. This year GDP growth is expected to breach the one per cent barrier again, not stellar but steadfast enough, having broken through zero in 2015.

Statistical body Cystat has just announced that unemployment has clearly dropped, to 12.8 per cent in the latest quarter, which would appear a step in the right direction, even if many would quibble over the precise reasons. The central bank reported that the banks’ non-performing loans ratio is diminishing steadily. Economic sentiment, by national index measurement, has returned to 2008 levels.

As to finances – the critical matter for eurozone authorities – the latest budget shows the overall deficit almost erased, while the non-interest component has achieved a clear surplus of over two per cent of GDP. That’s vital for working off accumulated debt. Meanwhile, rating agency Capital Intelligence (CI) has upgraded the Republic’s sovereign creditworthiness to B+.

CI noted specifically “the government’s commitment to reforms, [paving] the way for Cyprus to exit the international rescue programme without a safety net”. Thereby, the dreaded Troika departs the equation. Finance Minister Harris Georgiades has been keen to affirm that the current administration “can take it from here”. The mood music, while sober, is decidedly upbeat.

Speaking with the minister myself on behalf of a German financial daily last month, I was indeed struck by the confident calm now associated with trying to deliver upon the turnaround prospectus for this country that seemed so remote when disarray and dismay were dominating the headlines.

As an economist by background, I could see that, in the academic language that surrounds the issues of stabilisation and adjustment, Cyprus was determined to ‘own’ the programme. The government does so now, of course, hoping to convince voters that the patience and forbearance that they have shown is worth a collective endorsement in upcoming elections.

Beyond these shores, though, there is even a message for the rest of the EU, concerning the example that has been set. Although, again, there may be plenty enough criticism locally of what the government may do and may try to do, officials of the eurozone and the treasuries of the member states can hardly fail to be impressed by the apparent improvement here.

Not least, in terms of how it’s been achieved.

Georgiades was plain-speaking in our meeting that balancing the budget is necessary not just by itself, but because covering a deficit by extra taxation is damaging for the economy – thus the emphasis on spending cuts made to a notoriously bloated public sector and the welfare bill.

It’s a viewpoint that jars with much of the mainstream economics fraternity. They very often disparage the idea that budget restraint is compatible with boosting recovery, because it tends to withdraw economic demand relative to existing supply (output and jobs). But that ignores the beneficial impact, potentially substantial, on both supply and demand of displacing the wasteful parts of the public sector in favour of meaningful private activity.

Business can respond to the extra breathing-space, as a matter of confidence in the priorities being followed by government. In some ways, the sooner and sharper that process is undertaken the better. Georgiades pointed out that, in this construct, merely spending only what has been generated by tax is not austerity by the state; raising people’s taxes to pay for the deficit is austerity.

This unapologetic affirmation of the magic worked by sound government finances in an entrepreneurial economy is music to the ears of the Eurogroup. More importantly, it may also be sanctioned in large part by ordinary people, who are mostly perfectly attuned to household economics, and who doubt that government finance is so very different.

Not much that stems from the EU these days may be very convincing to those with a sceptical outlook or even merely enquiring mind. Yet, among the difficulties abounding across its political, economic, and security order, a modest light shines on its fringe in the shape of Cyprus, even leaving aside talk of gas development or reunification.

Doubtless skirmishes over the ideologies, implications and real consequences of economic policy measures will continue, as indeed they should in any democratic society. To outsiders, though, the country’s performance looks like a remarkable story, with a moral attached, albeit one that took three years to tell, and which might indeed be told again in retrospect in many different ways.

Andrew Shouler is a freelance journalist and economist

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