‘Cyprus must regain trust in civil society,’ says economist at Cyprus Economic Society Annual Lecture

“The overarching key word is ‘trust,’ among Member States and European institutions, between citizens and their governments.”

There is an increase in European solidarity and European integration in the current crisis, that makes the policy response much stronger, Marco Buti, Director-General for Economic and Financial Affairs at the European Commission since December 2008,insisted in the Annual Lecture at the Cyprus Economic Society on Wednesday.

 

“The overarching key word is ‘trust,’ among Member States and European institutions, between citizens and their governments. Cyprus is at the bottom half of European countries in this respect, and it must rebuild trust in civil society,” Buti points out.

“But Cyprus has greater trust in European institutions, and that will help it succeed in recovering from the crisis. “Europe must learn not just to win wars, but also to win the peace by building trust at every level,”

Buti explained that there is a ‘Jean Monnet compatibility test,” that he applied to the response to the financial crisis in 2009 and compared with the response to the current crisis (Monnet was one of the founders of the EU).

“In the financial crisis of 2009, the Jean Monnet criteria  were not met: Response was not effective; subsidiarity was not respected, the central budget was not employed well, and divisions between north and south were not managed.”

Essentially, Buti says that the lack of an integrated EU response to the 2009 crisis limited the effectiveness of that response.

Buti emphasises that Europe became fragmented around the issue of moral hazard – there was a placing of blame, by the north, on countries in the south which struggled with the fallout from the crisis.

“The difference with the current crisis is that no one could blame any countries in Europe for suffering from the pandemic.  We have a chance to make sure that the criteria in the Jean Monnet compatibility test will be satisfied. We have a response at both the national level and the European level, one which is well coordinated.”

The current EU response is less based on rule building and national priorities, as it was in 2009, but rather one based on institution building and supranational priorities.

“The quality of response has been different this time around,” Buti affirms, “and we’ve seen Germany and France move much more towards European integration than they did before. The result is clear in that the EU can now raise funds on the capital markets, something that the Member States – Germany in particular – have never allowed before.”

“What we do is effective,” Buti maintains. “There was a recent ECB study showing that a combination of ECB response in terms of monetary policy and  the decision of next generation EU in combination have reduced financial fragmentation in Europe.

 “This was the issue that hounded us throughout the 2009 financial crisis,” Buti complains.

 But are we not today still ‘hounded’ by the north-south divide in Europe?” economist Andreas Charalambous asked. “Is there not a general consensus that the north emerged stronger from the north-south divide?”

 Buti replied that not all the issues emerging from the north-south divide are pernicious. “In the last crisis the economic and political opposition over the questions of fiscal discipline was very negative.”

 But the north-south divide offers opportunities, Buti said. “If instead the divide is treated as a means of learning from each other, a way to help each other make crucial reforms and implement the Next Generation policies in a positive way, it can be very useful. The north-south divide does not have to be divisive.”

 Economist George Strovolides asked why the US seems to have been more successful in its recovery effort than Europe?

 “The US handling and impact of the pandemic benefited from more extensive lockdown measures than the EU,” Buti said. “The US also has a very much less developed and less generous social security system, so it could not afford a slower response.”

 The US also has a more  flexible reallocation of resources across sectors, and can make reforms more easily. Europe must learn to become more flexible and to make reforms more rapidly, as those  put forward by the Member States are essential to the Next Generation Europe plans.”

 “ We should consider, however,” Ioannis Tirkides, an economist with the Bank of Cyprus, commented, that the amounts of money in the Next Gerneration Europe plan are not great on a per-year basis.”

 Our efforts have to go well beyond the crisis response, Tirkides said, making use of the recent evolution of the EU.

 “The last crisis, which lasted from 2009 to 2015, saw vast changes to both the EU and to ECB policy. New mechanisms, like the ESM, were established. Then ECB governor Mario Draghi literally saved the euro by relaxing interest rates.

 Building on this is not easy. Today, the ECB lacks policy instruments needed to manage monetary policy – it’s powder is dry.

 What is needed is the completion of European Monetary Union and the establishment of a unified fiscal policy across the EU.

 That is a long way to go, but the kind of integration that Buti praises will not be complete without taking these steps,” Tirkides concluded.