THE GOVERNMENT was in celebratory mood after the European Commission’s announcement that Cyprus, with another three countries, “had taken action representing adequate progress toward the correction of the excessive deficit.” Cyprus had been placed on the excessive deficit watch-list last year, but would be removed from it on the recommendation of the Council, as a result of the measures taken by the government.
While on the surface this is good news, it could turn out to be a bad development for the economy as it would lead to complacency and inaction. In fact the danger is that President Christofias, who has been unwilling to take any measures to tackle the structural problems of public finances, would see the news from Brussels as licence to carry on procrastinating. He avoided the unpopular measures when he was under pressure from home and abroad so what is the likelihood he will take any tough decisions now that the pressure has eased?
If anything, he would see the Commission’s announcement as a Godsend, with parliamentary elections less than four months away. The government would not have to take any decisions regarding the public servants’ pay and pensions that would adversely affect AKEL’s electoral showing. There may be some discussions with the public servants’ union PASYDY before the May elections but nobody would realistically expect any decisions to be taken.
Perversely, the putting off of difficult decisions has become the government’s trademark. Christofias returned from the Geneva talks in buoyant mood because he had successfully resisted attempts to set a deadline for the completion of the talks, which meant that he would not have to take the necessary tough decisions – for a deal or the abandonment of the procedure – for another few months. The avoidance of decisions has become an end in itself, the policy objective of a president terrified of making choices that would spark hostility.
But whereas on the Cyprus talks he would almost certainly have to make a decision, one way or the other, before the end of the year, on the economy he would avoid dealing with structural problems until the presidential elections in two years’ time. It is not as if the budget deficit is anywhere near the 3 per cent of GDP target. As for the public debt, the forecasts are that it would continue to grow, but this obviously does not concern the Brussels bureaucrats, who were satisfied with the reduction in the deficit, not caring that this was achieved through tax hikes.
Satisfying the Commission’s demands, however, is not enough. The country’s creditworthiness was downgraded by one rating agency in November, while this month another two agencies warned that they would be following suit. The government is now being forced to pay higher interest rates to raise funds in international markets and the finance ministry is concerned about the rates it would have to pay when it tries to raise money later in the year.
Finance minister Charilaos Stavrakis admitted on Wednesday that “we have chronic problems” and claimed the government was committed to cutting the crippling cost of the public service and introducing pension reform, in order to prevent credit rating downgrades. Speaking after a meeting with representatives of Moody’s, he said “I was embarrassed showing the figures to analysts.” He was referring to the state payroll, which was in excess of €2 billion and represented a staggering 30 per cent of annual expenditure.
The parliamentary elections would cause the government to deviate from the path of fiscal discipline, insisted Stavrakis who claimed he had convinced all three rating agencies the government would achieve its short-term economic goals. While Stavrakis’ resolve is admirable, unfortunately, he does not have the final say on economic policy. This belongs to the president who has repeatedly vetoed policy decisions taken by the finance minister, because of opposition from the unions, which he is terrified of displeasing.
Had the government implemented the measures prepared by Stavrakis a year ago, there would have been no downgrading and we would not still be discussing how to cut the state payroll today. But Christofias vetoed the entire package during a news conference, because of the union reaction. What are the chances that he would allow his finance minister to tackle the economy’s structural problems now that the pressure to do so has eased?
By removing Cyprus from the excessive deficit list, the Commission may have dealt a big blow to the economy’s prospects of recovery.
