Eleven lessons from Cyprus’ that could apply Anywhere
Cyprus has paid dearly, and will continue to pay a high price for several years, for the profligacy of its public sector, the recklessness of its banks, and the procrastination of its policy makers in taking corrective measures in the face of the crisis. The jury is still out on whether Cyprus has learnt its lesson, a very expensive one indeed. For other countries, Cyprus’ bitter experience holds many lessons, for which a generous tuition fee has already been paid by Cyprus.
Lesson#1: Control public finances and the size of the public sector. If you cannot trust politicians to resist the temptation of paying supporters and cronies with public sector jobs and salary raises and privileges, adopt a constitutional requirement for balanced budgets and a low ceiling on public debt. Keep the power of public-servant unions in check.
Lesson #2: Know what your bankers are doing; they may not have the country’s best interests in mind; they may not even serve their own bank’s best interests. Without effective corporate governance and strict supervision they may be gambling depositors’ money by putting all their eggs in one basket or taking unreasonable risks or expanding into markets they don’t understand. Don’t be reckless, not even careless about risk exposure. Instead, be ruthless about risk assessment and risk management. Don’t trust the central banker blindly to keep the banking sector sound and solvent, or as former President Reagan used to say “trust but verify”.
Lesson#3: Do not allow your banking sector, or any individual organisation or company to become so big that it is too big to let it fail and at the same time too big to save. You are putting yourself in a no win situation, the economy in jeopardy and sovereignty at risk. Healthy competition, diversification, and proportionality have become bywords for prudence. A banking sector eight times the size of the country’s Gross Domestic Product, as was the case in Cyprus, could neither be left to fail, yet neither could it be saved by the country.
Lesson #4: Do not give away your currency and monetary policy by joining a common currency area such as the Eurozone if you are not able to compete. Invest first in research and technology, innovation and entrepreneurship, cost control and quality management to raise productivity, cut costs, upgrade quality and produce innovative products and services that are internationally competitive. Common currency areas, especially those which do not involve transfer payments from the better performers to the laggards, ultimately benefit those who are able to compete effectively at the expense of the rest.
Lesson #5: Do not allow your labour unions to acquire such strength as to hold a chokehold on vital sectors and the economy as a whole, or destroy the flexibility of the labour market. Learn from Cyprus’ experience with the unions; don’t repeat it. The insatiable demands of the unions especially those of banking employees and civil servants have been protagonists in Cyprus’ drama. Even today, with 16 per cent unemployment and rising and the public and banking sectors buckling under the weight of wage bills and overstaffing, the unions are blocking life-or-death reforms.
Lesson #6: Do not buy the economic tale about natural monopoly, or the social tale about the need to provide affordable services to the poor, or the political tale about sectors of national or strategic importance. State enterprises such as Cyprus Airways or semi-public organisations such as CyTA and the Electricity Authority, have proved to be little more than another vehicle to tax the citizen, to allocate positions and favours, and to share the loot among the political parties, while the customer citizen is stuck with exorbitant bills due to greed and inefficiency.
Lesson #7: Beware of easy credit, bubbles and pyramid schemes. The economic history of the world is littered with stories of economic collapses and catastrophes caused by “ingenious” schemes of buying into easy and quick riches. In Cyprus, first there was the rapidly rising stock prices of the late 1990s inflated by easy credit which in the span of a few years led to collapse and the loss of fortunes by many people. It has been labelled “the stock exchange scandal” and, though nobody was punished, the stock market never recovered, despite the institutional reforms.
Then it was the real estate bubble: inflated by easy credit, property prices kept rising at 20-30 per cent a year; yet no one expected them to stop rising much less to collapse. This came to be known as the “real estate bubble” which burst a couple of years ago. Property prices are now continuing to fall steadily increasing the number of unsecured loans. Another bubble kept gathering steam since the early 2000s and accelerated since we joined the eurozone. The financial and banking bubble was built on high deposit rates of interest, poorly secured lending, attraction of “offshore” companies and reckless investments in Greek bonds and global expansion without risk assessment; it collapsed under its own weight and it is still in a coma.
Lesson # 8: Do not deviate from the iron rule that ties the growth of wages to the growth of productivity; measure public sector productivity, and assess and pay civil servants accordingly. If you earn and spend more than you produce on a long-term basis you are not building a sustainable economy. Sooner or later the economy will collapse, sooner if it is hit by a global economic crisis, as in the case of Cyprus. With the meddling of political parties, the pressure of the labour unions, and the support of parliament, wages and benefits in the wider public sector rose well above productivity, contributing to budget deficit and increased taxation on the private sector, sinking the economy into deeper recession.
Lesson #9: Save for a rainy day. Build an emergency fund, the size of your GDP, as a security against uncertainties, world economic crisis and generally the vagaries of markets and nature. Save in good years for the bad years. If you spend the unusually high revenues in good years on salary raises and overstaffing as well as marginal and unproductive show-off projects, you increase the state’s financial obligations for bad years too without having the means to meet them and you set yourself for deficit spending, escalating debt, and a need for a bailout (or a bail in).
Lesson# 10: Anticipate problems and challenges and formulate alternative strategies. Act early and proactively while you still have time and resources, while the problems are still manageable and you can still set your own terms. Always have a plan B ready. Delays and procrastination carry a heavy price: the problem becomes that much bigger and more pressing, while you lose any bargaining power you may have had to influence the terms of support when you finally resort to it. Cyprus learned this lesson the hard way.
Lesson #11: Establish strong alliances but never forget that in international politics there are no friendships, only shared interests. While this was known since ancient times and was repeated many times in modern history, Cyprus almost blindly counted on its friends and allies in the EU to show their solidarity and run to its rescue. Instead, they were quite unsympathetic administering bitter medicine or “tough love”, as some of us see it. Even our blood brothers, the Greeks, officially have shown little empathy, despite the help from our side in their moment of need. Our interest and theirs in this juncture did not coincide.
Other countries in the European south and beyond should heed the lessons of the bitter experience of Cyprus with its banking and fiscal crisis that brought down its economic edifice, like a house of cards. Avoiding Cyprus’ mistakes can make the difference between a sustainable economic model or a casino-type economy with easy riches alternating with economic collapse.
Dr Theodore Panayotou is director of the Cyprus International Institute of Management (CIIM) and ex-professor of Economics and the Environment at Harvard University. He has served as consultant to the UN and to governments in the US, China, Russia, Brazil, Mexico and Cyprus. He has published extensively and was recognised for his contribution to the work of the Intergovernmental Panel on Climate Change won the Nobel Peace Prize in 2007. Contact: firstname.lastname@example.org
Howlin to public sector workers: If you swallow hard and vote yes, we’ll not be coming back for more
Would you trust this man to deliver?
The deal, if passed, will come into effect from July and run until 2016.
“If you consider this (and) swallow hard – I know it’s not easy – and vote for this, we’ll not be coming back again and we can plan our recovery over the next three years,” he said.
He added that “hopefully the next time we sit down to discuss pay and conditions with public servants, it will be on the basis of a recovered economy and we can talk about improvements in pay and conditions. That’s our objective.”
Trade unions and the Government will today begin considering the new agreement, when they receive the finalised copy of the draft deal from the LRC.
The controversial agreement will see pay cuts of 10% for those earning more than €185,000 and 5.5% for those earning more than €65,000 a year, as well as longer working hours and lower overtime payments.
The Government is seeking to save €1 billion over the next three years in a new deal on reform and productivity with the public service unions.
Minister for Public Expenditure and Reform Brendan Howlin yesterday invited the unions to talks designed to achieve, by agreement, further substantial savings in the public service pay and pensions bill. The Government is hoping accord can be reached by early in the new year.
Unions expect one of the main changes the Government will propose is longer working hours for staff with no additional pay. Other issues such as increments, premium pay rates and possibly reforms to existing grade structures could be on the agenda for the discussions.
Senior higher-paid staff who already work flexible hours could face cuts in their overall pay levels. Earlier this year, the Health Service Executive proposed staff should work two additional hours per week for the next three years.
The Government said yesterday the guarantees set out in the Croke Park agreement, no further cuts in core pay and no compulsory redundancies, would remain in force.
Government sources emphasised that savings of €1 billion in the pay and pensions bill were required by the end of 2015 “to meet the fiscal challenges” demanded by the bailout programme.
No precise details
However, the Government side declined to spell out precisely the nature of the reforms to work practices and the new productivity measures it would be seeking.
The Department of Public Expenditure and Reform said the Government would be seeking to secure “a significant advance” on the workplace change already delivered by public servants, and “a large sustainable additional fall in the cost of public service delivery in the period to 2015”.
“The Government is determined to meet its fiscal consolidation targets and reduce its deficit to less than 3 per cent by 2015. The gross public service pay and pensions bill accounts for 35 per cent of overall spending in 2012. On this basis, the Government considers that it is fair that it should contribute broadly one-third of the substantial expenditure consolidation that will be necessary over the next three years,” said the department.
It added that if the public service pay and pensions bill was to make the necessary contribution to the consolidation in expenditure necessary up to 2015, a new deal, setting out a new agenda for change and productivity, was necessary.
“The Government will also be seeking to secure an additional substantial reduction in the cost of public service delivery, including in 2013, through this process. We want to secure a significant evolution on the workplace change already delivered . . .” it said.
The public services committee of the Irish Congress of Trade Unions is to meet today to consider the Government’s invitation to talks on a deal. The largest public service union, Impact, will argue this should be accepted. Other unions were more cautious.
In a letter to Impact branches yesterday, union general secretary Shay Cody said members would benefit from an extension of Croke Park protections in light of dark forecasts.“The union will go into any talks with the objective of protecting members’ pay and pensions against further cuts . . . Achieving success will mean agreeing to measures that cut the public service pay bill in other ways.”
General secretary of the Civil Public and Services Union Eoin Ronayne expressed concern over whether lower-paid workers could achieve further cost savings.
We cannot underestimate what a defining moment it was for this Government when Brendan Howlin stood up and formally admitted what everyone has known for weeks: that the Government was chickening out on cutting some of the crazy allowances paid to those who work for the bankrupt Government of this bankrupt country.
It wasn’t as if Howlin had promised the earth. His modest goal had been to cut a mere five per cent this year from these allowances — extra pay that various people who work for the Government get for everything from underwear to being on their feet.
But even the minister who is supposed to be responsible for cutting public expenditure — now a matter of grave urgency in this country — could not face down the unions in order to cut one euro in 20 from these allowances. The minister whose department apparently harasses other departments on an almost weekly basis about making cuts and efficiencies, when it came to cutting a mere five per cent from what everyone agrees are at least partially anachronistic and ridiculous allowances, couldn’t do it. He bottled it.
He bottled it even though he had the kind of cover to implement cuts that no other minister in this State will ever have, hopefully. The IMF is here and can be blamed for everything.
We have lost our sovereignty, we are bankrupt and being run by foreigners, and still Howlin couldn’t get even five per cent off these allowances. One suspects that even the unions didn’t expect to get away with that. One suspects that the unions were poised to accept at least some trimming of these allowances. But no, virtually nothing. Because when Brendan Howlin looked into it, he discovered it was more complicated than he thought and that it would in fact contravene Croke Park.