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: email@example.com
There’s a piece in the SBP at the weekend that manages to encapsulate perfectly a certain world view. Under the line ‘How long will the middle class suffer in silence?’ Martha Kearns states…
“I’m as mad as hell and I’m going to take this any more!” The iconic cry from Peter Finch’s character in the movie Network could be adapted to become a battle cry for Ireland’s increasingly distressed middle-income earner.
Spiralling ever downwards under a mountain of debt, the so-called ‘squeezed middle’ is finding it hard to breathe.
This demographic of mainly private-sector workers is rarely heard on Joe Duffy’s daily radio show or seen at the latest anti-austerity march. More prone to silence, they probably don’t feel they have as much of a right to moan with the rest of them.
I find this most interesting that she should push the public/private sector divide. Though she seems a bit hesitant about it. Clearly some are public sector. It would be useful to know how they sneak in under the wire, so to speak.
Of course it’s impossible to quite make this case without it seeming, well, a little disproportionate. Hence the following sentence or two:
They are still employed, still (just about) able to pay their bills and maybe, just maybe, able to save up to go on a break to the sun for a week or two in the summer. So it’s hard to feel too much sympathy towards them.
Well yes. It is a problem. Isn’t it? I mean, why the sense of grievance when those on, say, significantly lower incomes find it vastly more difficult to do any of those things?
It’s important to remember that, while they are not covered by the Croke Park agreement, they have already had pay cuts similar to, or higher than, those mooted under the public sector deal and would be ecstatic at the idea of a pay freeze. Also, Budget 2013, with its property tax, PRSI contribution increases, motor tax hikes, cuts to child benefit and maternity benefit tax, was not kind to these people.
Looking at their pay cheques now, they would probably laugh at the term ‘middle-income earner’.
Actually, that’s nonsense, and she should know it. Now, I’m not PS myself, labouring under a contract with the PS. But… fairs fair. There have been wages cuts for PS workers long before those ‘mooted under the PS deal’. And they existed before CPI. There’s already – and she should know this, she really should, a ‘pay freeze’. Then there’s the small matter that unlike the private sector where the breakdown was some cuts, mostly wage freezes and in other instances wage increases, in the public sector there were systemic across the board wage cuts. Oh yeah, and pension contribution increases, and all the various bits and pieces imposed by CPI as well. And of course ‘Budget 2013’ impacts in precisely the same way upon public sector workers as private sector workers.
Still, perhaps it’s best that she moves onto a new target.
…it was with a heavy heart that this section of society examined last week’s new government plan for troubled mortgages, as they knew that if anyone was to benefit from it, it wouldn’t be them.
The Central Bank didn’t mess around: it warned that repossessions were on the cards and families would be losing their homes; even those engaging with lenders could lose their homes.
Of course, this is distressing news for the people who are unable to pay their mortgages. The latest figures show that around 144,000 homes are in arrears, with those already structured and buy-to-lets bringing it up to 180,000.
Now some would suggests that for all the obvious caveats that 180,000 are in a pretty dismal place and many, perhaps most, through no fault of their own but due to the excesses of a market which was cheered by political, media and economic commentators as being at the exemplar of the success of this state.
However, while it is distressing, they are being offered a way out. Long-term deals could result in them downsizing to a more affordable home or continuing in their current homes with lower levels of debt, if they get some sort of write-down.
But what about the 420,000 mortgages that continue to be paid? For sure, some of those people have no problems meeting their debts, but there is nothing in the plan for those who are struggling to pay their mortgages but continue doing so.
These are the people who never complain or take to the streets. They’re made to feel lucky – guilty even – that they still have a home, a job and some sort of lifestyle.
Actually that raises the thought that isn’t that precisely what PS workers are often made to feel. indeed looking back a few sentences in her own story, isn’t that what she is sort of implying?
Anyhow, back to the rationale as to why the middle class are different…
It doesn’t matter that they have worked for 15 to 20 years to get to their position in their careers only to be back earning wages they were taking home ten years ago – only now they also have a negative equity mortgage and a family to support.
But [Michael Noonan] doesn’t seem to realise that the people who are not in “mortgage distress” but are in other sorts of financial distress (as a knock-on from ensuring that the mortgage is the first bill to be paid) are also no longer participating in the economy.
They are no longer buying their lunch or morning coffee, they are cancelling their health insurance and cable television subscriptions. They are getting rid of their second cars, cutting their trips to the pub and no longer paying a babysitter so that they can have a night out at the cinema.
They are scrutinising every pay cheque to make sure they have enough money in the bank to cover the mortgage and crippling creche fees, maybe even putting one or two payments on the credit card.
In a way this is amazing, if the writer is being entirely sincere. But the problem is that in a society where others are doing so much worse and that she is unwilling to expend any time on building some degree of solidarity across sectors and classes that it’s impossible to take this at all seriously.
Again, she sort of kind of sees the contradictions in her stance:
Of course, it’s hard to feel sorry for these people in a world where others are on the breadline. That’s why you won’t hear them on the radio or see them on the streets.
But you don’t have to be on the breadline or in mortgage arrears to be struggling. This group may be silent, but the evidence of their distress can be seen everywhere – in the boarded-up shops they once supported, the empty pubs they once frequented and the cinemas they no longer go to.
There’s an element of truth there, that the lack of disposable income is crushing jobs, gutting the economy. But this isn’t just about the middle class, and that class – however nebulously one can define it (and her own caveat as regards the PS early on in the piece is telling) isn’t alone in feeling the pinch and worse. Indeed it’s precisely because of the lack of interest, and yes – solidarity – expressed that the position of this supposed middle class is being laid bare as being vastly more contingent than its cheerleaders might like. And needless to say there’s no reflection on the thoughts that firstly for many in the working class the things she takes for granted simply aren’t a feature in good or bad times or that in the latter the situation worsens.
Of course this is part of a much larger process, a transfer of wealth that it would appear is quite deliberate, a shift towards making near universal the instability, the poor provision whether social or otherwise, that is a facet of everyday life for many working class people whether employed or unemployed. And yet the immediate response, the instinctive one, at least as exemplified in this piece is to go looking for people to blame. Everyone but themselves.
Which brings to mind Ben Franklin’s point that “We must hang together, gentlemen…else, we shall most assuredly hang separately.”
Social solidarity. Once gone not easy to get back.
The Association of Secondary Teachers in Ireland (ASTI) will ballot its 17,500 members on the deal in the coming weeks.
The union’s standing committee said the proposals from the Labour Relations Commission would worsen working conditions for teachers while also cutting their pay.
“The proposals come at a time when second-level schools are reeling from the impact of the education cutbacks including significant reductions in staffing and resources,” the union said in a statement this evening.
Senior members said public sector workers had already taken a cumulative pay cut of 14 per cent in recent years, while delivering “substantial” savings under the terms of the original Croke Park Agreement.
The union added that the supervision and substitution allowance – worth about €1,800 a year, which would be abolished under the proposals – would have “a disproportionate negative impact on low-paid part-time and temporary teachers” who had come rely on that money.
It also claimed that some aspects of the deal had yet to be clarified, and that it could not recommend the deal to its members while some of its impact remained unknown.
The union has become the sixth, of the 15 public service unions, to publicly recommend a No vote.
The INTO, which represents primary teachers, did not issue a recommendation; the other main secondary union, the TUI, and the university lecturers’ union IFUT are both seeking a No vote.
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.
Mr Kenny voiced the need to increase pressure to secure savings from the agreement at a meeting this afternoon.
He told the body that while the Government remains committed to the Agreement, it is facing extraordinarily difficult choices to meet its 2013 spending targets.
Mr Kenny said delays in reforms were not acceptable, and the issues around allowances must be brought to a swift conclusion.
He said the negotiations with the hospital consultants was an example of what could be achieved and the same principle had to be applied across the public sector.
Radical reforms in the local government sector will be brought to Government shortly.
It is understood that no financial target will be available until after further engagement at sectoral level.
Mr Howlin said that he indicated on 18 September that one category amounting to 88 allowances would be looked at with a view to eliminating them under the Croke Park Agreement.
The full list has not been released, but it is thought to include a Gaeltacht allowance for nurses in Irish-speaking areas and a Locomotive allowance for senior gardaí who use their private cars for work.
They are set be abolished by the end of February.
“This is core pay, breach of Croke Park [Agreement], and whatever we have to do to protect our members’ pay we will do so,” he said.
“If people want to consolidate those allowances into pay, which we asked for many years ago, well then we’ll have that discussion.
“But we will not be getting into negotiations where we see the elimination or further cuts in people’s salary, that’s not where we are and we won’t be there.”
It represents a significant U-turn on his decision last month to abolish just one of the 1,100 public sector allowances. At the same time, the savings gained will be minimal as many of the allowances involved apply to a minority of public servants.
Fine Gael TDs had experienced a major public backlash over Mr Howlin’s apparent reluctance to cut public service wages.
The allowances that will now be abolished by the end of February include:
* Gaeltacht allowance paid to nurses in Irish-speaking areas, worth €3,500 per year.
* Locomotive allowance for senior gardai who use their private cars for work.
* Acting-up allowance for senior council officials.
* Entertainment allowance for Defence Forces officers who are posted abroad.
* Medical training allowance for consultants, worth €3,000 per year.
The overall cost of the 1,100 allowances in the public sector is €1.5bn per year.
Mr Howlin’s department has not released the full list of 88 allowances facing abolition, or how much the move would save.
But he is now putting pressure on every government department to abolish allowances, which they had said were worth keeping in previous business cases.
The gardai had argued that the locomotion allowance for senior members was “cost-effective and value for money”. The Defence Forces had defended the entertainment allowance on the grounds that its officers were representing the State abroad and were “required to entertain in accordance”.
But they cautioned that they will need to see the full detail to assess the significance of it.
But while Fine Gael backbenchers may have been placated, Mr Howlin’s plan sets him on a collision course with public-sector unions.
Watchdog to tackle public-sector allowances after failed Howlin cull – National News – Independent.ie
PAC chairman John McGuinness said it already intends to call for a special hospital consultant pre-retirement bonus to be binned.
“The Committee of Public Accounts can do a very good job for the taxpayer by putting all allowance payments under public scrutiny, and that is what we intend to do on a case-by-case basis,” he said.
Mr McGuinness said he would allow the committee to question the heads of public bodies on the payment of allowances.
It is seeking information from accounting officers on the extent of allowances paid to staff, the rate, their value and the date they commenced.
The move follows Mr Howlin’s report on the contentious allowance and expenses system.
He had planned to cut the bill by €75m this year but admitted failure, claiming only one of 1,100 allowances for existing staff could be scrapped – a €218 representational allowance for staff attending European Union meetings. That saved €3.5m.
THE GOVERNMENT is expected to announce reductions in allowances for staff in the Civil Service who previously served as private secretaries to Ministers. There are 800 allowances paid across the public service and this looks likely to be one of the few targeted.
Up to now staff who served as private secretaries to Ministers have been able to keep 50 per cent of the allowance once they had been in the post for more than one year.