Cyprus Mail
CM Regular Columnist Opinion

The economics of the coronavirus

Finance Minister Constantinos Petrides.

WHAT we collectively call ‘the economy’ is a fairly complex system of interactive economic sub-systems in which a plethora of checks and balances ensures that the overall system is kept in an equilibrium and functions effectively and efficiently.

When the system is thrown off balance by a certain incident such as the coronavirus pandemic, the prescribed therapy, which aims at bringing back the lost equilibrium, not only must contain the right ingredients but such ingredients must also be in the right quantity in the appropriate measure.

What is readily understood in medicine, namely that too much of the right drug can easily kill the patient and that too little would be ineffective, is often ignored when attempting to remedy problems in the economy.

The impact of a pandemic, such as that caused by the coronavirus, is a dramatic slow-down of the economy. For example, the demand for airline seats and holiday packages, for long-term capital assets and for luxury goods is slashed overnight.

As a result, the suppliers of such goods and services inevitably see their revenues being decimated. In turn, such enterprises experience problems in discharging their obligations towards their creditors suppliers of raw materials, spare parts and services, including employees, thus depriving the latter of the money needed to buy goods and services, even when urgently needed, as is the case with food, accommodation and medical supplies.

A simplistic prescription is to get the state to pump ‘easy and cheap’ cash into the economy in the hope that such a move would bring the system back into its lost equilibrium, as it plans to later today.
According to Finance Minister Constantinos Petrides, the fiscal package “is much larger than the equivalent packages in the rest of the EU”.

I have no hesitation in saying that such a blinkered approach is naive and dangerous and can easily create more problems than the ones it is trying to solve. Only a targeted, focused approach has any chance of bringing about the desired results.

The first goal of state interventions in such circumstances is to ensure that everybody understands there is no way that the economy can absorb such a huge shock without feeling the impact, and that the impact is bound to be painful. So, Lesson number one is ‘brace for impact’. For example: drastically reduce salaries, wages, rent and unnecessary expenses.

Lesson number two is to ‘focus on long-term survival. This rule applies to business concerns as well as to individuals. The objective should not be to avoid feeling the pinch through, for example, borrowing. Mortgaging your future serves no purpose and, in the medium and long-run, it is going to aggravate the problem.

Admittedly, such short-term thinking may serve a purpose, if you are a dishonest and irresponsible person and you have decided to grab as much money as you can, conceal it well and then cry for further help and state protection. Unfortunately, there are a few of those around.

In this game, the banks – as the principal providers of finance in Cyprus – have an important role to play and they must ensure that they discharge this role in a responsible fashion.

This brings me to Lesson number three, which is ‘never provide credit if repayment is not reasonably assured.

If it is certain that an enterprise or an individual cannot avoid bankruptcy, it serves no purpose to prolong the agony by throwing good money after bad. Let the patient die and focus on helping those who can recover from the ailment.

Needless to say that the same rules apply to the state as much as they apply to all the other players involved in the economy game. In its efforts to tame the beast, the Cyprus has gone on a spending spree – on medical supplies and equipment, requisitioning the services of medical and other staff, requisitioning private clinics and hotels, repatriating people to Cyprus.

It is also providing financial incentives to students to stay abroad, paying unemployment to temporarily out-of-work staff, subsidising the cost of electricity, reducing VAT, and deferring tax and other obligations. It is so tempting for the politicians to spend money but they very rarely concern themselves with the potential adverse consequences of their behaviour.

We have two goals. One is financially helping people in need and the second is pumping money into the economy to keep the ball rolling.  Both goals are legitimate and it would be very difficult to argue against such measures.

However, who should be entitled to such financial support and to what extent, given that almost everybody is being adversely affected? To ensure that the funds go where they are really needed, the support should be made conditional on the filing of a signed detailed statement of wealth and income and listing all the assets owned by the claimant, his/her spouse and underage children.

Then, we have the question of how should the cost of providing financial support to the needy be financed, given that Cyprus does not have ‘savings’, which could be used for this purpose?

Again, we have two options. Either levy additional taxes or borrow money.  Additional taxes would be counterproductive in executing the second objective. This leaves only one option and that is borrowing.  But what do you do, if the state is over-indebted as is the case with Cyprus?  Is it not unfair to saddle your children and grandchildren with debts and interest?

These are the dilemmas which the politicians must take a stand on because to simply argue, as they do, that we must help the needy is tantamount to evading the issue.

Cyprus has a huge public debt and unresolved past problems such as non-performing loans and a politically-unstable environment, which still exist and still threaten our future. Dishing out money indiscriminately for the sake of being likeable is irresponsible and should be castigated instead of applauded.

Christos Panayiotides is a regular columnist for the Cyprus Mail, Sunday Mail and Alithia

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