Cyprus and the Eurocrisis: Novelty and lessons learnt
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”.