What Needs to Be Done
The Cyprus government faces three monumental challenges. First, a UN-imposed “deadline” recommends that the forever on-going negotiations over the reunification of the island must come to a successful end by October. Second, the lost trust of the citizens and respect towards authority has to be restored. Third, the structural problems that the economy faces must be identified, understood, and resolved by a government that has yet to convince the domestic and foreign markets that it has the capacity and the will to do so.
Never has the Republic, since the post-invasion history of the island, been confronted with such serious, and co-existing challenges. Now, the government is asked to deal with these challenges promptly before the situation gets out of hand. So far, it failed to do so.
Can the situation get better before it gets worse? Yes, but it requires strong initiatives on behalf of the government. Here are my humble thoughts.
Put the negotiations for reunification of the island on hold for now. This removes some uncertainty on the future of the Cyprus economy and allows the government to focus on the economy. It is unrealistic to assume that this or any other government has the capacity to solve both the Cyprus problem and the unfolding economic crisis simultaneously. It is simply impossible. And no solution will be sustainable and welfare enhancing for both communities if it comes during times of hardship and times of distrust for the authority. The economic crisis, locally and globally, along with the threatening remarks from Turkey provide the perfect backdrop for putting the negotiations aside for now.
Dedicate all resources to navigating the economy out and not into the crisis. A successful resolution of the crisis will bring social stability and will raise the chances that the two communities have in finding a viable and long-lasting solution.
Accept that (i) the mess is not as big as it seems (ii) the objective must be macro-economic stability in the long term and not in the short term, and (iii) some sacrifices in the short term will be unavoidable.
Paradoxically, the economic crisis is much bigger than many anticipate, but smaller than you think. The failure to understand the weaknesses in the system and to act promptly and with determination makes the crisis bigger than many think. On the other hand, in relative terms, the dire economic conditions that the other economies face make the crisis seem smaller. Consequently, to Cyprus’ favor, it takes less work to make the economy look stronger when the rest of the world is in deeper trouble. This is a manageable crisis.
But the government must finally act. The delay only exacerbates the problem so that any future actions have to be bigger, bolder, and more painful. And there is a fear that the measures may come too late, when the economy spirals out of control.
As you think about these measures, hopefully for not too long, consider whether you want to address the structural problems in the economy, or provide short-term solutions. The former will make the economy more competitive, will bring macro-economic stability, and provide jobs for the youth. It will also bring respect. The latter will satisfy the few, domestically, but will pass on the problem, albeit bigger, to future governments and generations. There is really no choice. A socially responsible government has to fix the structural problems in the economy. You are choosing to take a different path and this is worrisome.
The country is blessed with strong institutions, hard working people, and a high quality educational system that makes all citizens proud. Overall, public sector employees work with dignity, professionalism, and care. We must be grateful for their work and from time-to-time we must acknowledge their contributions.
But we must also acknowledge that this is the time to reduce some of the government spending and to contain the size of the public sector. We must also maintain our status as a financial center at all costs. Being a financial center offers high employment for the locals, high paying jobs, high rents, large tax revenues for the government, international connections, high liquidity to our banking sector that is used to finance development projects, and positive spillovers to other sectors in the economy, mainly services related. The consequences of even a reduction in the size of the off-shore sector, let alone a loss of the status as a center, will be devastating.
The economy sits at a crossroad. There are two paths, and each leads to exact opposite outcomes. Make no mistake, the future of the country is in your hands. Think responsibly and focus on the path that is right for the long-term not just the short-term. With some common sense and courage, you will help the country emerge out of this crisis and become stronger. As economists say, never let a good crisis go wasted. This is your time to shine. Use the power you have for the benefit of the country and the country will be forever grateful for what you will have achieved in such turbulent times.
Dr. Alexis Antoniades
Visiting Assistant Professor, Economics
Georgetown University School of Foreign Service and QNFSP, Office of the Heir Apparent State of Qatar.