Cyprus and the Euro­cri­sis: Nov­elty and lessons learnt

Financial Mirror (Cyprus) - - FRONT PAGE - By Nikos Christodoulides

March has been an event­ful –to say the least- month for Cyprus, and for me per­son­ally as part of the Cypriot del­e­ga­tion to Brus­sels. Dur­ing last week’s very chal­leng­ing Euro­pean Coun­cil, there were mo­ments I could not help feel­ing a fright­en­ing sense of déjà vu:

I re­call say­ing to my­self: “Three years ago, nearly to the day, we were try­ing to man­age an un­prece­dented eco­nomic cri­sis in an ef­fort to save the Cyprus econ­omy”.

Pres­i­dent Anas­tasi­ades had barely moved into Pres­i­den­tial palace, and the sit­u­a­tion was al­ready dire.

The dilemma then was crys­tal clear: you ei­ther swal­low the bit­ter – and po­ten­tially poi­sonous – pill, never be­fore pre­scribed to a sick pa­tient or mem­ber state, or your banks will be starved of cash.

As a mem­ber of the Cypriot del­e­ga­tion at that March 2013 Eurogroup, I – and the rest of the del­e­ga­tion – were stunned by the un­equiv­o­cal, al­most co­er­cive heavy hand of our EU part­ners.

When the new govern­ment as­sumed of­fice in March 2013, Pres­i­dent Anas­tasi­ades was well aware that the Cypriot econ­omy was in se­ri­ous trou­ble. The fol­low­ing facts were clear: ? The fi­nan­cial sec­tor had run an un­sus­tain­able credit boom for more than a decade, which fu­eled a prop­erty and con­sump­tion boom;

- The im­pact of the de­ci­sion to im­pose a hair­cut on Greek sov­er­eign debt left our banks on the brink of col­lapse;

- There was a se­vere fis­cal cri­sis. The pub­lic buf­fers were lit­er­ally on the brink of ex­haus­tion. The econ­omy, cut off from the mar­kets since 2011, was still run­ning ex­ces­sive deficits year over year;

- The struc­tural weak­nesses of the Cypriot econ­omy were also ex­posed by the cri­sis, while,

- The econ­omy was al­ready in re­ces­sion and un­em­ploy­ment had al­ready grown 400% within the past five years.

Ne­go­ti­a­tions with the in­sti­tu­tions – the so-called Troika ? had started long be­fore the new govern­ment was sworn in, with no agree­ment reached by the for­mer ad­min­is­tra­tion. They knew time – and money – was run­ning out, and it was a de­lay that cost Cyprus dearly.

The March 2013 Brus­sels meet­ing was sched­uled just two weeks af­ter the new govern­ment as­sumed of­fice. The of­fi­cial re­ports re­vealed a sit­u­a­tion far more se­vere than any­one ex­pected. In re­al­ity, Cyprus was faced with an im­mi­nent eco­nomic col­lapse, which in mag­ni­tude was com­pa­ra­ble only to the eco­nomic disas­ter that fol­lowed the 1974 Turk­ish in­va­sion. In fact, this was the equiv­a­lent to Cyprus’ Great Re­ces­sion.

Cyprus went to the first Eurogroup to ne­go­ti­ate a bailout, as had been of­fered to other EU mem­ber states. Such an agree­ment would al­low the Cypriot econ­omy to be un­der a vi­able pro­gramme, while tak­ing on board our EU part­ners’ con­cerns.

None­the­less, the signs from Europe were any­thing but en­cour­ag­ing. The ma­jor­ity of Eu­roarea coun­tries took a dis­pro­por­tion­ally harsh stance on Cyprus. And I say dis­pro­por­tion­ally, be­cause we must not for­get that Cyprus is a small and non-sys­temic coun­try, with just 0.2% of the Eu­ro­zone’s GDP.

Cyprus’s EU part­ners, hav­ing ini­tially mis­di­ag­nosed the causes of the cri­sis, were de­ter­mined to tighten the eco­nomic gov­er­nance of the Eu­ro­zone. Cyprus could serve ei­ther as an ex­am­ple for other economies on the ge­o­graph­i­cal pe­riph­ery of the EU or, even, as an ex­per­i­ment for the Eu­ro­zone’s fu­ture de­signs on pol­icy.

At this point, it would be fit­ting to touch upon the “state of the Euro-union” with re­spect to the ar­chi­tec­ture be­hind the com­mon cur­rency.

Cyprus, as well as all other coun­tries af­fected by the cri­sis, paid the price of an in­com­plete eco­nomic and mon­e­tary union, lack­ing a strong eco­nomic gov­er­nance frame­work – with strict fis­cal rules – as well as a bank­ing union. The EU had de­signed a sin­gle Euro­pean cur­rency, per­haps its most am­bi­tious political pro­ject and bravest step to­wards an “ever closer union”, which in essence was – and to a cer­tain ex­tent re­mains – some­what of an empty shell.

The fi­nan­cial cri­sis and the Euro­cri­sis showed that the in­tegrity of the Euro area as a whole is at risk, and that the ob­jec­tives of the Treaties – such as in­clu­sive and sus­tain­able growth, sound fis­cal po­si­tions – can­not be at­tained if the frame­work has weak­nesses.


The most im­por­tant chal­lenge faced in re­cent years has been to guar­an­tee that the EMU frame­work is at­tuned to the re­quire­ments of shar­ing a com­mon cur­rency. Nev­er­the­less, a re­newed political con­sen­sus at the high­est political level re­mains nec­es­sary at this stage to pro­ceed with fur­ther mea­sures to ad­dress the main short­com­ings of the EMU frame­work that were re­vealed by the cri­sis.

With an eco­nomic Ar­maged­don in sight, with the se­cond largest sys­temic bank al­ready at the point of no re­turn, and with EU sol­i­dar­ity mostly nowhere in sight, Pres­i­dent Anas­tasi­ades was forced to ac­cept an un­prece­dented and ques­tion­able Eurogroup de­ci­sion, which in­cluded a se­vere hair­cut of bank de­posits.

I would not call it a “dilemma” as much as I would call it a most un-Euro­pean political and fi­nan­cial act of black­mail, with no room for ne­go­ti­a­tion: you ei­ther ac­cept the to­tal­ity of what is pro­posed or we will make sure the banks col­lapse, with a risk of ex­it­ing the euro in sight. This, to a newly elected, pro-Euro­pean, pro-in­te­gra­tion leader of the EU’s only di­vided, and un­der mil­i­tary oc­cu­pa­tion coun­try.

Cyprus swiftly agreed on a pro­gramme of eco­nomic re­form and fis­cal con­sol­i­da­tion. With strict cap­i­tal con­trols in place, the spec­u­la­tion amongst econ­o­mists was that the pro­gramme came too late; there were voices, both in­ter­nally and in­ter­na­tion­ally, that Cyprus should de­fault; that we should leave the Eu­ro­zone or even the EU.

The govern­ment had two op­tions: ei­ther to ful­fil Cas­san­dra’s prophe­cies, or to take own­er­ship of the pro­gramme, turn it into an op­por­tu­nity for true re­form, and con­sol­i­date the sys­tem by cor­rect­ing chronic weak­nesses so as to exit the pro­gramme as soon as pos­si­ble.

And this is pre­cisely what the govern­ment did. It took own­er­ship, per­sis­tently con­vey­ing the mes­sage to its cit­i­zens that this was not a pro­gramme im­posed on us but rather a pro­gramme owned by Cyprus for the ben­e­fit of the coun­try and its peo­ple. This is per­haps a key point of dif­fer­ence be­tween Cyprus and other coun­tries un­der Troikaad­min­is­tered pro­grammes.

In March 2013 no one – nei­ther in Cyprus nor in­ter­na­tion­ally – could have pre­dicted that three years later the Cypriot econ­omy would reg­is­ter growth, that Cyprus would not need to make use of the full amount of the bailout funds, and that there would be no re­quest by Cyprus for a new pro­gramme. Though the path was not easy, that is ex­actly what Cyprus went on to do. And Cyprus gave the EU a pos­i­tive achieve­ment story.

Three years fol­low­ing the Eurogroup’s March de­ci­sion, Cyprus is reg­is­ter­ing: - Eco­nomic growth of 1.6%; - A nearly bal­anced bud­get with a pri­mary sur­plus of 2.5%; - A steadily re­duc­ing pub­lic debt; and - A well-cap­i­talised bank­ing sec­tor.


Key to this suc­cess is the fact that Cyprus man­aged to suc­cess­fully turn the cri­sis into an op­por­tu­nity, and, through ro­bust re­form, bank re­struc­tur­ing and fis­cal con­sol­i­da­tion, to ef­fec­tively ad­dress and cor­rect long-term weak­nesses, and to re­build a strong econ­omy an­chored on solid foun­da­tions.

Un­like in many other EU mem­ber states un­der a bail-out pro­gramme, in Cyprus this was done not by in­creas­ing taxes, but rather by cut­ting pub­lic spend­ing, freez­ing new hir­ing in the pub­lic sec­tor and ra­tio­nal­is­ing wel­fare spend­ing through a com­plete over­haul of the wel­fare sys­tem.

More­over, a pol­icy of pri­vati­sa­tion and li­cens­ing is un­der­way, which en­com­passes the ports, an in­te­grated casino re­sort, new mari­nas, the na­tional lot­tery, and semipri­vati­sa­tion within the tele­com sec­tor.

The bank­ing sec­tor has been trans­formed through re­struc­tur­ing, re­sult­ing in a smaller yet much health­ier in­dus­try, which op­er­ates un­der stricter su­per­vi­sion and over­sight. With strong re­cap­i­tal­i­sa­tion, achieved mainly through sig­nif­i­cant di­rect for­eign in­vest­ments, and with new man­age­ment in most of the banks, the Cypriot bank­ing sys­tem has turned a new page. Chal­lenges re­main, such as high un­em­ploy­ment and non-per­form­ing loans. As Cyprus de­ci­sively con­tin­ues to re­form and re­struc­ture, we are con­fi­dent that we will over­come the re­main­ing chal­lenges.

In the last three years, Cyprus has proven that it has learned from past mis­takes, that its econ­omy and its peo­ple are re­silient, and that it has the com­mit­ment and the ca­pa­bil­ity to build and sus­tain a sta­ble econ­omy and to be a cred­i­ble mem­ber of the EU and the Eu­ro­zone. The re­sults of this ef­fort have un­doubt­edly been a prod­uct of close co­op­er­a­tion among the Govern­ment, political par­ties, so­cial part­ners and above all the Cypriot peo­ple. In this re­gard, this col­lec­tive ef­fort will con­tinue.

The com­ple­tion of the bailout pro­gramme is there­fore not the end of the road, but sig­ni­fies the con­tin­u­a­tion of our plans, with a strong em­pha­sis on struc­tural re­forms.

Three years later, with the Euro­pean pro­ject again fac­ing cri­sis, I be­lieve it is fair to say that the Cypriot case mi­cro­cos­mi­cally em­bod­ied the wider EU cri­sis – a cri­sis that sig­nif­i­cantly dam­aged the EU in­te­gra­tion process. It also dam­aged the re­la­tion­ship among EU mem­ber states. It is also a cri­sis that was ma­nip­u­lated by pop­ulists to at­tack the EU, and bring to the sur­face a dan­ger­ous political de­bate about the pos­si­bil­ity of the EU’s dis­in­te­gra­tion, ig­nor­ing the in­cred­i­ble achieve­ments of what is to my mind the most suc­cess­ful political pro­ject of the 20th cen­tury.

The cri­sis also re­vealed the flaws of the Euro-sys­tem: a mainly political ex­per­i­ment that pro­vides a mon­e­tary union with­out a com­plete political union, or at least an ef­fec­tive mech­a­nism for fis­cal con­sol­i­da­tion.

The EU was lack­ing ef­fec­tive mon­e­tary su­per­vi­sion from the Euro­pean Cen­tral Bank, with sig­nif­i­cant struc­tural re­forms nowhere in sight. It was th­ese sys­temic weak­nesses that al­lowed, or even en­cour­aged many euro mem­ber coun­tries to build ex­ces­sive fis­cal deficits and ex­ter­nal in­debt­ed­ness; the end re­sult was ex­ces­sive risk taken by the bank­ing sec­tor, and it nearly caused to­tal col­lapse in Cyprus. It is clear that the pros­per­ity of our cit­i­zens is at risk if the right frame­work is not put into place.

While we are very much en­cour­aged by the fact that sig­nif­i­cant ac­tion has been taken at EU level, in or­der to ad­dress th­ese sys­temic weak­nesses, with new in­sti­tu­tions be­ing built and new com­mon rules agreed, there are still some im­por­tant steps to be taken in achiev­ing a true Eco­nomic and Mon­e­tary Union.

Cyprus and other mem­ber states have paid a heavy price not only as a re­sult of our own mis­guided poli­cies, but also as a re­sult of the weak­nesses of the eco­nomic gov­er­nance and su­per­vi­sion of the Eu­ro­zone and the EU. This is why Cyprus has ac­tively sup­ported and will con­tinue to sup­port re­forms at the level of the Union. I am con­vinced that Europe learned its les­son and that it will suc­ceed in evolv­ing, as it did many times in the past. This is why the Euro­pean pro­ject serves as a guide for all, es­pe­cially Cypri­ots.

The suc­cess of the 60-year-old Euro­pean pro­ject, de­spite its dif­fi­cul­ties, is a re­sult of the cre­ation of in­ter­de­pen­den­cies through in­sti­tu­tional, le­gal, and most im­por­tantly, eco­nomic and mar­ket means. It was the es­tab­lish­ment of the four fun­da­men­tal free­doms and of com­pe­ti­tion; the abo­li­tion of bor­ders, the peace­ful co­op­er­a­tion through trade and vol­un­tary ex­changes; it was the real ap­pli­ca­tion of the prin­ci­ple of sub­sidiar­ity. The an­swer to the chal­lenges that the EU is fac­ing – in­clud­ing the cur­rent un­prece­dented mi­gra­tion cri­sis –has to be not less, but more Europe. The an­swer lies in that core prin­ci­ple of the EU’s found­ing fa­thers: “An ever closer Union”.

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