A REVIEW of the Cost of Living Allowance (CoLA) is among a list of actions that Cyprus needs to consider as part of further structural reforms, European Central Bank (ECB) President Jean-Claude Trichet said yesterday.
Along with the praise heaped on Cyprus during the Euro Day celebrations, both Trichet and European Commission President Jose Barroso said that the government’s work in achieving long-term fiscal stability was only just beginning.
“Being a member of the euro area is a responsibility. It requires the right ongoing economic policies, including a sound budgetary policy,” Barroso said.
Trichet said that in order fully to reap the advantages of the euro and to ensure sustainable convergence, additional efforts with structural reform should be undertaken and appropriate policies implemented.
In his list of suggestions, Trichet called for a review of the inflation-linked CoLA, which is added to wages every six months.
Trichet said the indexation mechanism for wages and for some social benefits should be reviewed in order to reduce risks associated with inflation, inertia and losses in competitiveness, which is one of the arguments of Cypriot employers who oppose CoLA.
“Such measures will not only make Cyprus’ economy more resilient to shocks, but also create the best conditions for sustainable economic expansion, employment growth and price stability,” he said.
When Central Bank Governor Athansios Orphanides recently suggested a review of CoLA his suggestion was knocked back by the entire political spectrum.
But during yesterday’s event at the Central Bank Orphanides reiterated his position without specifically mentioning CoLA.
“We must be careful not to allow obsolete attitudes and practices that are no longer effective in the context of the euro area to hamper our potential progress,” he said.
“To be sure, many existing economic recipes worked relatively well in the past under different conditions. We must be mindful, however, that not all such practices can continue to work equally efficiently in the present circumstances and in the future.”
Trichet said the Cypriot economy needed to continue on a sustainable and credible path of fiscal consolidation based on structural measures, to improve its fiscal performance by reducing its debt ratios and to comply with the medium-term objective quantified in the convergence programme.
In particular, public finances should have sufficient room for manoeuvre in order better to cope with the expected substantial increase in age-related public expenditures, the ECB chief said.
Wage settlements needed to remain moderate, taking into account labour productivity growth, labour market conditions and developments in competitor countries, he added.
Barroso said joining the euro was just the start of the process for Cyprus, “not the end”.
He said as the Commission recommended in its Strategic Report for the Spring European Council, Cyprus, despite its strong performance, needed to implement further reforms with a view to improving fiscal sustainability.
“It should also boost life-long learning and increase training and labour market opportunities for young people, so that all Cypriots can play a full role in Europe’s knowledge economy of the future,” said Barroso.
