By Jean Christou
ECONOMISTS were divided yesterday on the Central Bank governor’s warning that the government had to curb public spending or face problems with the EU’s Maastricht criteria.
Governor Christodoulos Christodoulou, a Finance Minister in the previous government, said the fiscal deficit could go beyond the projected 3.9 per cent of GDP and that drastic and unpopular measures must be taken before EU accession next year.
The Maasricht criteria sets a 3.0 per cent of GDP ceiling, a level Cyprus was in line with until last year, when it was pushed off course by the global and domestic decline.
One economist, who wished to remain anonymous due to his public status, said he agreed with Christodoulou, but believed too much emphasis was placed on the Maastricht criteria.
“As an economist you don’t have sacred cows when it comes to curbing public spending,” he said. “An economist would say cut down on development projects, hiring, travelling but as a politician can you do this? The solution is obvious, you either tax or cut down.”
Commenting on the government’s fixation with staying within the Maastricht criteria, the economist said there was a tendency to overemphasise this issue, “which to my mind is wrong”.
“The criteria were designed for those already in Europe and operating with all the conditions of Europe,” he said. “To say you are in line with Maastricht and you haven’t entered Europe fully and you haven’t experienced the unemployment that might result… Enter Europe and see whether your industry is competitive. If your industry isn’t competitive you will have unemployment and you will speed up the government’s financing of unemployment benefit and at that point measure whether you are consistent with Maastricht. We used it as a measure of compliance with Europe much earlier than we should have.”
The economist said the Cyprus economy was still relatively healthy and had proved time and again that it was resilient to shocks and managed to survive.
Stockbroker Stavros Agrotis agreed that the government was thinking ‘one track’ in its rush to satisfy EU criteria and said that even though Cyprus had fallen somewhat behind after years of being first in the class, it could regain its place with more long-term thinking.
“We seem to have lost type of momentum we were used to… doing better than those around us, but it is the effect of the global stagnation. It’s not a Cypriot problem, it’s a global problem,” he said.
“We tended to do better than the rest of the globe and the concern is that this time around we might not be; at the same time we have an extra pressure because of the desire for speedy entry into Europe. It’s these factors that are creating the unease at the Central Bank.”
Agrotis believes the economy should be left alone to adjust, with some input from the government in terms of stimulating the economy towards a medium to long-term goal.
“We are unfortunately concerned with short-term, the next one to two years,” he said. “I believe Europe will not be negative towards us if the measures we take are medium to long-term, and even if we are not the best pupil in the class this year, we might be the best pupil in the class the year after.”
Professor Panos Pashardis from the University of Cyprus said he agreed with the views of the Central Bank governor and called for cuts for spending in the public sector.
“This is what they should try to do and I think there is scope for this.”
Pashardis said the economy was suffering due to the drop in tourism, the island’s biggest earner. “And I think this is going to go on for a while,” he said.
In terms of EU performance, Pashardis said Cyprus was no longer any better than the other candidate countries due to the rise in inflation in the wake of the VAT hike to 15 per cent this year.
“We have to wait until the end of this year and see what the fiscal deficit is going to be,” he said. “Public spending can be reduced, especially in supplementary budgets regarding the workings of government. There is scope to save on hiring in the public service. I’m sure the government knows and they are in a position to know better. All I’m saying is that they could do it if they wanted to.”
But one economist, Costas Apostolides, disagreed with the Central Bank’s prognosis and said it was not a good time to cut back, despite the uncertainty in the economic arena.
“The rate of growth is very low this year; we are not doing too badly but we might have problems,” he said. “But we have to wait until we have better circumstances and a higher rate of growth and then the situation will largely correct itself. We have to ride out the year and see what the situation is next year to correct the budget deficit.”
Apostolides agreed the government was sticking too rigidly to the Maastricht criteria, “and things like that which are not relevant to the present situation but are a medium to long-term objective”.
“We are not too badly off compared to other candidates and we are better than most, but the point is a few years back we were dead in line with Maastricht, so we would need some time to get back to that.”
Apostolides added the issue was related to how quickly Cyprus joined the eurozone. The government wants to join the eurozone as soon as possible, but the earliest new members will be able to join will be 2006.
“We should examine if we want to get into the eurozone as soon as possible,” Apostolides said, adding that some of the other candidates were going to delay eurozone entry for at least two years.
He said that when Cyprus had been within the Maastricht criteria there was no reason to delay euro entry, “but owing to the economic difficulties we have been having over the past few years, which is still better than anyone else’s but still not up to our usual standard of growth, it would make more sense in this relatively difficult economic environment.”
The Cyprus Mail is the only English-language daily newspaper published in Cyprus. It was established in 1945 and today, with its popular and widely-read website, the Cyprus Mail is among the most trusted news sites in Cyprus. The newspaper is not affiliated with any political parties and has always striven to maintain its independence. Over the past 70-plus years, the Cyprus Mail, with a small dedicated team, has covered momentous events in Cyprus’ modern history, chronicling the last gasps of British colonial rule, Cyprus’ truncated independence, the coup and Turkish invasion, and the decades of negotiations to stitch the divided island back together, plus a myriad of scandals, murders, and human interests stories that capture the island and its -people. Observers describe it as politically conservative.
