Our view: Government intervention in market economy is dangerous

Governments in Cyprus have tended to be led rather than lead, often shunning measures that are deemed unpopular until they are absolutely necessary. They have a tendency to be swayed by public opinion, which might be orchestrated by opposition parties, unions or the media. This government has followed this tradition rather zealously given that one of President Christodoulides’ election pledges was that he would listen to the people.

A worrying aspect of this approach has been the constant state intervention in the market economy, which has created the impression that this is a government obligation, ostensibly to protect people. Continuous protests about ‘expensiveness’ – the populist term used for inflation – led the government to scrap VAT on a range of products, supposedly to protect purchasing power while keeping in place, by public demand, the reduced consumer tax on petrol long after the world price of crude oil had fallen.

Paradoxically, while inflation was rising, the government also decided to increase the percentage of CoLA paid, which pushed prices further up, while a little later the minimum wage was increased by more than 10 per cent, affecting some 25,000 workers. Although these measures made no difference in making the ‘expensiveness’ more manageable, they silenced the government’s critics, to a large extent, while promoting the idea that state intervention in determining wages was a good thing.

This thinking was reinforced by the theatrical attempts by Finance Minister Makis Keravnos to persuade the banks not to increase interest rates in line with ECB rates so as to help people with housing loans. The banks ignored his public pleas and letters to go against the ECB policy aimed at fighting inflation across the euro zone, but the point that this government was prepared to interfere in the workings of the market was made yet again. Now it appears to have become a given and is expected to happen all the time.

Keeping with the spirit of the times, on Tuesday Labour Minister Yiannis Panayiotou, while reviewing his first year in office, boasted about all the restrictions he had imposed on the labour market. He appears to be on a mission to prevent the law of supply and demand determining wages, to the obvious delight of the unions he closely works with. He pledged to step up inspections of illegal workers by 65 per cent, carry out a census of all workers and give a say to unions about the employment of third country nationals.

All this at a time when we are close to full employment and by Panayiotou’s own admission there is a need for some 150,000 foreign workers to cover the market’s labour needs. Hoteliers, meanwhile, are complaining that they will not have enough staff to open for the tourist season. A pragmatic minister would have cut businesses some slack at a time of acute labour shortages, but Panayiotou is turning the screw on them, regardless of the harm he would cause the economy.

Panayiotou, to be fair, is not a renegade minister who has declared war on the market economy – the government has set the agenda. Apart from the above-mentioned cases, a couple of weeks ago, the council of ministers approved a bill that would allow the commerce minister to fix prices for products of broad consumption at specific points of sale. Explaining the decision, minister George Papanastasiou gave as an example bottled water at ports and airports. It was a disingenuous example, considering the price of bottled water at airports hardly merited control through legislation. We suspect there is a hidden agenda and the government would use this law to set maximum prices on other products.

Giving itself more powers to intervene in the market is a very dangerous path, putting at risk the operation of the market economy, to which Cyprus owes its growing prosperity. Living standards have steadily risen because, since joining the EU, the market has opened up and the old restrictions were scrapped. It is thanks to a smoothly functioning free economy that Cypriots enjoy such a good standard of living today. It is certainly not thanks to meddlesome bureaucrats and politicians interfering and placing restrictions on the market’s operation to curry favour with interest groups. There are enough union imposed imperfections in the market, which create costly distortions, without the government adding to them.