Green transition could damage businesses say industry leaders

Captains of industry on Thursday called for “fast reflexes and bold decisions” on the part of the government to head off alarming trends in the economy – especially the costly transition to EU ‘climate neutrality’ targets and the rising cost of doing business.

In a statement following a meeting of its executive committee, the Federation of Employers and Industrialists (OEV) warned that “despite the remarkable resilience demonstrated by the real economy after a succession of crises, the trends registering in the wider economic environment are worrying, while the margins for businesses to effectively adapt are constantly shrinking.”

Noting that the cost of energy remains “unacceptably high,” OEV said this particularly undermines the competitiveness of the export industry – including the hotel industry.

“Whereas actions taken to secure safe and inexpensive electrical energy are in the right direction, they need to be accelerated.”

The federation said that the price of money has reached historically high levels following successive interest rate hikes by the European Central Bank.

“Tapering off interest rates is a must, given that inflation in Cyprus has already declined, while maintaining high interest rates hurts economic growth.”

OEV also said that because it is “impossible” for salaries to rise in line with increasing housing costs, the state should come up with an affordable housing programme, especially for young couples.

The federation stressed the financial impact on businesses and individuals alike from the ‘green transition’, noting that “people have yet to grasp its scope, while the state’s plans to assist and support this transition are not yet visible.”

It went on to warn that “without adequate preparation and support, the goals of ‘climate neutrality’ are “capable of derailing the productive restructuring of the country and lead to insurmountable sustainability challenges for countless business entities.”

Asked about this point, OEV director-general Michalis Antoniou said the bulk of investment in ‘green technologies’ would come from the private sector. Business faced with these extra costs would inevitably pass them onto consumers.

“We can’t opt out of climate neutrality,” Antoniou told the Cyprus Mail. “So, what we need in Cyprus is a realistic action plan to help businesses transition. We need to give people incentives to transition – because right now what we’ve got is the stick, but no carrot.”

He cited as one example the withdrawal of old vehicles running on conventional fuels and their replacement with hybrid/electrical cars.

“Perhaps the banks could get involved, providing low-interest loans underwritten by the state.”

Elsewhere in its statement, OEV zeroed in on the growing state payroll. It noted that during the first half of the year the payroll was €161 million higher compared to the same period of 2022.

“The only way out of this vicious cycle is to bring back and update the forgotten reform concerning a restructuring of the public sector through digitisation.”

Such a reform would lead to a new organisational structure “with a numerically smaller, appreciably less expensive and more effective state machine.”

On welfare spending, OEV pointed out that this had increased by €212 million during the first half of 2023 compared to the same period last year.

Though not questioning the need for a robust social safety net, OEV said social spending must be “targeted and restricted to vulnerable groups, temporary and designed to help beneficiaries become financially self-sufficient.”

Taking a big-picture look at the state of public finances, the federation said the primary fiscal surplus receded to €155 million by the end of June from €570 million at the beginning of the year.

And even though national debt dropped from 101 per cent of GDP at the end of 2021, to 86.5 per cent of GDP at the end of 2022, “this is mostly due to the increase in nominal GDP because of high inflation.”

At the same time, refinancing the debt will take place in a milieu of high interest rates, and this at a time when Cyprus’ sovereign credit is still rated junk by Moody’s.

The statement concluded: “The state as well as the political parties must steer clear of any policies that could potentially undercut the country’s status as an investment destination, or policies triggering risks to financial stability and public finances.

“Such policies include, but are not limited to, a one-off taxation on windfall gains in any aspect of economic activity, a thinning out of the legal framework governing foreclosures, or an indirect reduction in pensionable age.”