CENTRAL Bank Governor Athanassios Orphanides yesterday called on the public service to lead by example in initiating reforms to make the most of euro adoption.
In a review of the euro changeover he gave to businessmen in Limassol, Orphanides suggested the simplification of the public sector’s procedures, the reduction in bureaucracy, and the streamlining of the services. These were greatly needed, he said.
“It is crucial to realise that adopting the euro is not sufficient to guarantee economic success. Indeed, there is diversity in the experiences of countries that have adopted the euro before us and it is up to us to draw the right conclusions from those experiences,” said Orphanides.
“History suggests that no country secures satisfactory economic growth without the appropriate economic structures and national policies in place.”
Orphanides said the magnitude of the success in Cyprus would depend on the choices made.
“In our case, fiscal policy should be more vigilant and disciplined to maintain a stable macroeconomic environment conducive to sustainable long-term growth,” the Governor said.
He said the current relatively favourable economic conditions in Cyprus provided an opportunity to further consolidate and strengthen public finances, “creating room for manoeuvre in less favourable times”
“As is well known, the recent improvements in public finances are partly due to temporary factors, such as the increase in revenues from real estate, which are not expected to continue at such high rates,” Orphanides warned. Greater vigilance in preserving healthy public finances was therefore warranted, he added.
He also said reforms necessary to face future challenges within the euro area were not limited to those related to public finances.
Another area of particular concern, highlighted by European Central Bank President Jean-Claude Trichet during his recent visit to Cyprus, related to the indexation of wages and salaries in some sectors of the economy.
The reference was to the inflation-linked Cost of Living Allowance (CoLA, which is added to wages every six months.
“This is one of the legacies of the past that can potentially create acute problems for our economy in the euro area,” said Orphanides, who has previously called for a review of CoLA.
He said that in general, wage increases should be in line with productivity growth and developments in competitor countries.
Otherwise, wage increases would lead to higher inflation risks and a loss in our competitiveness.
“In the public sector in particular, the current wage indexation mechanism implies that increases in inflation would be permanently incorporated in salaries, further increasing the already high state payroll,” said Orphanides.
“In addition, the indexation of wages makes labour less flexible as it reduces incentives for workers to move from sectors of low profitability to more profitable ones.”
Orphanides said, however, that keeping wage developments in line with productivity did not imply wages should be kept low.
He said that by striving to maintain and increase competitiveness, sustained wage increases could be maintained in the long run.
