Sir,
When the Central Bank Governor, Christodoulos Christodoulou, warns that the public deficit and public debt need to be cut, these dire warnings deserve to be heeded. In shorthand, he is saying that the current Cypriot standard of living is not fully earned, which on the latest figures cannot be disputed.
However, like most central bankers he sees cutting the civil service and public sector wage bill as a solution. This has been the now discredited International Monetary Fund’s solution to deficit and public debt problems in many countries: all have either failed or produced mixed results.
The reasons these solutions have not worked and will never work is that the public sector alone is rarely large enough to deal with the scale of the crisis.
Cyprus entered the European Union with the highest standard of living and highest GDP per head of all the 10 new entries. It must now compete with them from a higher wage base as it seeks to capture the established markets of the EU. It can only do this by improving productivity faster than its fellow entrants or adding value in other ways.
The consequences of the “unearned” wage base in Cyprus is that it is now the most expensive holiday destination in the Mediterranean with the exception of a seven-mile coastal strip in southern France. Instead of reducing prices to combat the fall in tourism hotels, restaurants and bars have increased prices to serve a smaller number of tourists. This policy can only lead to tourism being further weakened.
Farmers, instead of seeing the answer in higher productivity to compete with Poland and other new entrants, asks the government to buy them out.
Shipping must now comply with EU rules, and many ship owners will seek lower safety standards elsewhere. Similarly, the offshore industry must comply with the OECD agreement by January 1 2005.
In the face of all the problems, there is only one solution that adds up. This is the sacrificial one of building a better tomorrow by a three-year wage freeze across the public and private sectors, which unions will be reluctant to countenance if they perceive it as a boost to profits as it would be. This remedy would produce the result of a slowly declining standard of living as the island became competitive with its fellow new entrants. The other superficially easier course is a devaluation of the currency by between 21 and 25 per cent which would produce the same results over three years.
The Central Bank governor is right: the present situation cannot long continue. Ultimately a standard of living has to be earned and be earnable in the context of a global market. Cyprus has to do this one way or the other.
Philip Jeffrey
Limassol
