Troika fixes fail: How to fix the Troika

Financial Mirror (Cyprus) - - FRONT PAGE -

There is no coun­try in which the Troika could claim suc­cess. The aus­ter­ity mea­sures de­manded by the EU, ECB and IMF re­mind me of a doc­tor’s pre­scrip­tions that make the pa­tient worse. And it could get worse for us all: the Troika poli­cies can­not be sus­tained with­out fur­ther strains in the Eu­ro­zone and the EU as a whole.

Par­tic­i­pat­ing in the Eu­ro­zone makes it dif­fi­cult for a coun­try to pur­sue dis­cre­tionary poli­cies to ad­dress a se­ri­ous re­ces­sion, as it has to stick to a tight deficit re­duc­tion plan. This leads to the deep­en­ing of the cri­sis with fur­ther cuts in pub­lic spend­ing and in­creased taxes. In ef­fect we have a sit­u­a­tion of au­to­matic desta­bilis­ers! Th­ese poli­cies in con­junc­tion with a tight mon­e­tary pol­icy lead to a vi­cious de­fla­tion­ary cy­cle. For the Eu­ro­zone to func­tion, there must be a sys­tem of fis­cal support by the cen­tre, a phi­los­o­phy that is cur­rently miss­ing.

Take the Cypriot case. The coun­try had a very pro-EU record: dur­ing the ac­ces­sion ne­go­ti­a­tions, polls had re­vealed a record level of pro-EU sen­ti­ment. This was re­lated to high ex­pec­ta­tions from the EU, that ac­ces­sion would con­trib­ute to a so­lu­tion for the Cyprus prob­lem and that it would also help mod­ernise so­cial, eco­nomic and po­lit­i­cal struc­tures.

Nev­er­the­less, when Cyprus found it­self in deep cri­sis, due both to en­doge­nous and ex­oge­nous fac­tors, its treat­ment was un­ex­pected and ex­tremely harsh. By 2012, Cyprus was fac­ing a huge bank­ing cri­sis, se­ri­ous fis­cal im­bal­ances and a real es­tate bub­ble. Ad­mit­tedly, Cypriot pol­icy-mak­ers and other stake­hold­ers had en­gaged in im­pru­dent prac­tices with dev­as­tat­ing re­sults. But ex­oge­nous fac­tors had also con­trib­uted: the global fi­nan­cial cri­sis, the Eu­ro­zone cri­sis and, above all, the hair­cut of the Greek debt in Oc­to­ber 2011 dur­ing which Cypriot banks lost EUR 4.5 bln – about 25% of the is­land’s GDP.

De­spite the dif­fi­cult cir­cum­stances, a dif­fer­ent ap­proach could have been utilised. In De­cem­ber 2012, par­lia­ment passed fis­cal ra­tion­al­i­sa­tion mea­sures; salary cuts and higher taxes – a mod­est step in the right di­rec­tion. A new Pres­i­dent, Ni­cos Anas­tasi­ades, had been elected in Fe­bru­ary 2013, com­mit­ted to eco­nomic ra­tion­al­i­sa­tion in con­sul­ta­tion with his EU part­ners. It seemed at long last that it was pos­si­ble to se­cure a ra­tio­nal sta­bil­i­sa­tion plan. Ru­mours and press ref­er­ences about a bail-in seemed to fade. Nev­er­the­less, Cyprus was treated in an ir­ra­tional but also bru­tal and puni­tive way in March 2013. Ac­cord­ing to the ex-For­eign Min­is­ter of Spain, Miguel An­gel Mo­rati­nos, the EU acted my­opi­cally by not help­ing Cyprus ad­dress the cri­sis; on the con­trary, with the dic­tated aus­ter­ity poli­cies it deep­ened the cri­sis.

The Eurogroup de­ci­sions were in­flu­enced by other con­sid­er­a­tions: the tim­ing of the up­com­ing Ger­man elec­tions, the ob­jec­tive to con­tain Rus­sian pres­ence in Cyprus, to use Cyprus as an ex­per­i­ment for fu­ture crises and to send par­tic­u­lar mes­sages to other, big­ger, more trou­ble­some coun­tries. Cyprus did not de­serve this treat­ment. With such at­ti­tudes and prac­tices, the EU will not move to­wards deeper in­te­gra­tion. Apart from the huge sol­i­dar­ity deficit there are deep in­sti­tu­tional, struc­tural and cul­tural dif­fer­ences be­tween the mem­ber states. In­creas­ingly, sev­eral coun­tries see Ger­many as hege­monic, while the Troika is fac­ing prob­lems of le­git­i­macy, as its eco­nomic phi­los­o­phy both in the­ory and prac­tice lacks rea­son and sen­si­tiv­ity. un­der­stood that the pay­ment of pri­vate and pub­lic debt can­not take place while eco­nomic ac­tiv­ity is re­ced­ing; fore­clo­sures will not get rid of NPLs. The im­ple­men­ta­tion of the sug­gested pol­icy will not worsen the fis­cal sit­u­a­tion; tax rates will be cut, but rev­enues will in­crease be­cause of a dy­namic process which will see re­duced un­em­ploy­ment com­bined with a new ap­proach of high penal­ties for non­com­pli­ance.

In relation to bank­ing prac­tices, while in the past many were im­pru­dent, after March 2013 strict pro­ce­dures have ef­fec­tively limited the grant­ing of loans. This has a neg­a­tive im­pact. In­deed, we have passed from a state of great im­pru­dence to that of suf­fo­ca­tion. This should be re­versed and the prin­ci­ple of the golden mean should be ap­plied. Fur­ther­more, given that the bail-in was harsh and un­nec­es­sary, the EU should find ways to a com­pen­sate Cyprus with a spe­cific (mini) Mar­shall-type plan. Last but not least, ra­tion­al­i­sa­tion plans should also take into con­sid­er­a­tion in­sti­tu­tional ar­range­ments and cul­tural is­sues.

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