‘No need for deficit policies’

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.