‘No need for deficit poli­cies’

Financial Mirror (Cyprus) - - FRONT PAGE -

Cyprus will not re­lax its bud­getary tar­gets, Fi­nance Min­is­ter Har­ris Ge­or­giades said at the 12th Econ­o­mist Sum­mit in Ni­cosia. He fur­ther noted that “un­like oth­ers in Europe, we do not be­lieve in deficits poli­cies, nor do we be­lieve that growth comes through deficits and debt.”

He noted that this is the rea­son why Cyprus en­sured ex­cep­tion­ally good fi­nan­cial per­for­mance, be­cause the coun­try wanted to cre­ate trust, re­li­a­bil­ity and pre­dictabil­ity in re­la­tion to its eco­nomic pol­icy, the Cyprus News Agency re­ported.

“Since 2014, we op­er­ate with a pri­mary sur­plus of around 2.5% of GDP, while for 2017 we have tabled a bud­get that pro­vides a pri­mary sur­plus of 2.1%. Only one or two other mem­ber-states pur­sue and plan to achieve sim­i­lar per­for­mance,” he said.

He added that th­ese are facts which are not dis­puted by ei­ther the Euro­pean Com­mis­sion or by any­one, as no pa­ram­e­ters of the bud­get are chal­lenged, for ex­am­ple the pro­jected growth be­tween 2.5% -3 % of GDP in 2016.

“It is there­fore un­for­tu­nate to arise an is­sue from a not so trans­par­ent, tech­ni­cal process that cal­cu­lates po­ten­tial pro­duc­tion, which sub­stan­tially takes pa­ram­e­ters sug­gest­ing that the econ­omy of Cyprus goes through an over­heat­ing phase, which is, of course ir­ra­tional,” he said.

At the same time, the Min­is­ter sent the mes­sage that ad­di­tional mea­sures are out of the ques­tion, be­cause this would lead to a pri­mary sur­plus in ex­cess of 3% of GDP, some­thing com­pletely un­nec­es­sary and coun­ter­pro­duc­tive, which would un­der­mine the growth prospects.

“I re­ject any in­crease in taxes with the same in­ten­sity that I re­ject any ir­re­spon­si­ble rise in pub­lic spend­ing,” he said.

He also said that if “we have cho­sen to move to­wards fur­ther re­duc­ing of pub­lic spend­ing we should -in con­trast to what the Com­mis­sion seems to im­ply- to ac­com­pany th­ese re­duc­tion of costs with a cor­re­spond­ing re­duc­tion in tax­a­tion”.

This, as he said, would be nec­es­sary to en­sure fis­cal neu­tral­ity and sta­bil­ity and to main­tain the right bal­ance be­tween sus­tain­abil­ity of pub­lic fi­nances and eco­nomic re­cov­ery, some­thing that Cyprus, as he said sought and achieved, re­spond­ing in this way to the false dilemma fac­ing Europe on aus­ter­ity or growth.

On his part Klaus Regling Man­ag­ing Di­rec­tor of the Euro­pean Sta­bil­ity Mech­a­nism high­lighted the need for a con­tin­ued re­form ef­fort fol­low­ing Cyprus’ exit from the ad­just­ment pro­gramme.

Re­call­ing that Cyprus man­aged to cover it re­fi­nanc­ing needs from the in­ter­na­tional cap­i­tal mar­kets, Regling pointed out that this “is one of the pos­i­tive re­sults of go­ing through the ad­just­ment pro­gramme.”

“Cyprus has over­come many of its prob­lems which made it much eas­ier to es­tab­lish fi­nanc­ing,” he said and ex­pressed hope that struc­tural re­forms will con­tinue which in turn could help at­tract in­ter­na­tional in­vest­ments to the econ­omy.

Fur­ther­more, Regling noted that Europe has come a long way since the 2008 fi­nan­cial cri­sis.

“It is the mis­taken view that Europe is stum­bling from cri­sis to cri­sis, with­out learn­ing. It is the mis­taken view that Europe is an un­fin­ished project, and that it mal­func­tions,” he said.

“The pre­vail­ing pes­simist view on Europe is cer­tainly ex­ag­ger­ated. The truth is, on the whole, Europe is do­ing rea­son­ably well. It has made tremen­dous progress since the cri­sis,” he added.

Not­ing that chal­lenges re­main, as al­ways, Regling stressed “but we can tackle them with rel­a­tively small steps, in com­par­i­son to the huge leaps Europe has taken in the last 6 years.”

Speak­ing at the same con­fer­ence, Un­der­Sec­re­tary to the Pres­i­dent Kon­stanti­nos Petrides said that the govern­ment in­sists on re­forms and specif­i­cally on the ac­tual Re­form Pro­gramme that has been sub­mit­ted, in­stead of be­ing com­pla­cent in a new post­mem­o­ran­dum beau­ti­fied but vir­tual re­al­ity.

“We will con­tinue to seek the min­i­mum con­sen­sus to im­ple­ment this pro­gram, to re­move the re­main­ing en­dur­ing patholo­gies of the sys­tem and to avoid rep­e­ti­tion of the wrong poli­cies that cost us so much in the pe­riod be­fore Mem­o­ran­dum,” he said.

At the same time, he said that a govern­ment pro­posal for a deputy Min­istry for Growth in­cludes the com­pe­tence and re­spon­si­bil­ity to im­prove the com­pet­i­tive po­si­tion of Cyprus, and the re­lated ac­count­abil­ity for the coun­try’s progress.

“We are try­ing to cre­ate a min­istry for the Econ­omy, not a Fi­nance Min­istry”, he said, not­ing that Cyprus is the only coun­try in the EU that does not have a sim­i­lar min­istry with a cen­tral role in pol­icy mak­ing.

He also said that growth is not achieved or main­tained with the shar­ing of the ex­ist­ing wealth, or with the con­tin­u­ous ex­pan­sion of pub­lic spend­ing, but it is achieved and main­tained by cre­at­ing new wealth through in­vest­ment. He added that in­vest­ments re­quire a com­pet­i­tive econ­omy, an econ­omy that re­quires re­forms.

Vin­cenzo Guzzo, the IMF’s rep­re­sen­ta­tive in Cyprus, said the main chal­lenges fac­ing the is­land’s econ­omy are de­mo­graph­ics and weak­en­ing pro­duc­tiv­ity, point­ing out at the same time four key pri­or­ity re­forms for Cyprus.

Guzzo re­ferred to lower fer­til­ity rates over the past ten years that are not go­ing to be bet­ter over the next year. As he said an age­ing so­ci­ety will put pres­sure on pen­sions and health sys­tems that can worsen the dy­nam­ics of the debt.

He re­ferred to a weak­en­ing pro­duc­tiv­ity growth in Cyprus and EU coun­tries.

“The com­bi­na­tion of un­favourable de­mo­graph­ics and weak­en­ing pro­duc­tiv­ity cer­tainly dampen the prospects for po­ten­tial growth in the medium terms”, he said, adding that th­ese prospects could lead to less in­cen­tives to in­vest.

Guzzo also said that struc­tural re­forms are so im­por­tant be­cause they play a crit­i­cal role in trans­lat­ing the good signs of the econ­omy into a more long-run growth.

Re­fer­ring to four key pri­or­i­ties for Cyprus, he said that th­ese are re­pair­ing the bank bal­ance sheets and ad­dress­ing NPLs, com­mit­ting to a cred­i­ble medium term fis­cal con­sol­i­da­tion that will help build a fis­cal space to chan­nel pub­lic money more pro­duc­tively to­wards in­vest­ment. The other pri­or­i­ties should be elim­i­nat­ing prod­uct and labour mar­ket dis­tor­tions and pro­mot­ing poli­cies that en­cour­age in­vest­ment in re­search and de­vel­op­ment and foster in­no­va­tion. Guzzo said that the IMF’s fore­cast for Cyprus is now 2.8% GDP growth for this year.

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