Will a new government mark a new beginning for Cyprus?

15 February, 2013 | Posted By: Theodore Panayotou

By Theodore Panayotou
Cyprus International Institute of Management

In a few days, we will have a new President and a new government. The million-dollar question or rather the 17-billion-euro question is this: Will this mark a new beginning for Cyprus or will we get more of the same, wrapped in a different colour. This is arguably the most important election since 1974 and possibly since the founding of the Republic in 1960.
It is also the first time that the outcome of a Cyprus election attracts pan-European, and possibly global, interest and significance. Normally, presidential elections in countries with a population under a million, even trouble-countries like Cyprus, would be relegated to the inside pages of world press and go unnoticed. Not this time.
The heightened interest arises from the fact that Cyprus faces the prospect of default while being a member of the Euro zone, and has asked for a bailout from its European partners. Cyprus needs a loan the size of its economy which will bring its debt to 140% of Gross Domestic Product, an unserviceable and unsustainable level. The authorities vehemently resist the idea of selling state enterprises to lower our debt level and committing part of its future natural gas revenues to service debt obligations.
The government has money to pay salaries only until April and needs €1.5 bln for a loan that is due in June. In the absence of a bailout, Cyprus will default and “cexit” (exit from the euro) which may trigger a contagion and become a systemic threat for the Euro. The fact that the Cyprus’ banking sector is 7-8 times the size of the economy is part of the reason. Another part is Cyprus’ low corporate tax rate and the “suspicion” that money laundering may have taken place, which concerns the potential lenders, especially big countries like Germany.
Another reason is that Cyprus has discovered, in its EEZ, significant quantities of natural gas, and possibly oil, which can contribute to Europe’s energy independence. To complicate matters Turkey, the aggressive 800-pound gorilla in the area, disputes the rights of Cyprus to this new found wealth and threatens with reprisals at the same time that Turkey is a possible route for transporting the Cyprus natural gas to Europe. To counter the threat, Cyprus deepened its collaboration with neighbouring Israel and signed contracts for exploration and exploitation of its gas fields with big companies from the likes of the US, France, Italy and South Korea.
For all these reasons, this weekend’s presidential election is like no other. The outcome can help resolve all these open questions but it could also prolong the uncertainty and turn the situation into a Greek drama for both Cyprus and Europe. People who followed the unfolding of the economic crisis over the past three years to its current crescendo are wondering if this election will bring about the catharsis and a new beginning for Cyprus or whether it will be more of the same.
Listening to the campaign rhetoric and the populist promises of the candidates one cannot be too optimistic that the gravity of the situation has sunk in. We have again a cornucopia of promises even though the Promised Land offered by the winners of previous elections has not materialised, under much more auspicious circumstances. Even if only a fraction of what is currently promised is achieved, we will soon be speaking of a new economic miracle and energy independence for Europe, while that intractable Cyprus problem would become history, and Cyprus will be a key player in world affairs. If hubris, populist promises, and convenient excuses for failure to deliver were taxed, Cyprus would have been running budget surpluses and our national debt would have been paid in no time.
However, we cannot lose hope. We may have hit rock bottom but this, by itself, creates lifting forces. After all hope is the last to die. Campaign promises aside, Cyprus needs a new beginning and we can only hope that the new president’s government will trigger it.

First and foremost, the Bailout Memorandum must be concluded in a speedy manner to remove the debilitating uncertainty. Its provisions must be implemented to the letter to correct the many distortions accumulated over half a century of amateurish governance and legitimised corruption. The speedy recapitalisation of the banks, the resumed liquidity and the resumption of lending, but with proper scrutiny and risk assessment, will all help kickstart consumer demand, economic activity and investment. Until a turnaround is attained, however, provisions must be made to protect the most vulnerable groups that truly suffer from the deepening recession.

Second, it is of paramount importance to reestablish the credibility and trust with our partners in Europe and around the world which we lost in the past couple of years with our procrastination, inconsistency and the mixed messages and above all our blame game and failure to accept any responsibility for our own actions and failings. As a small country in dire need of help, we should abandon the tactics of confrontation which we confuse with assertiveness and try to win back friends and allies through consistency and a spirit of cooperation. Even internally, we need to regain our broken trust in our institutions and each other and to work together to get ourselves out of the mess and recriminations in which we are currently wallowing.

Third, the productivity of the public sector must be doubled and its cost to the private sector in terms of taxes, bureaucracy and delays cut in half. The instruments are well known: a system of productivity measurement and performance-based assessment of civil servants, acquisition of transferable skills and interchangeability across the public service, and universal implementation of electronic government.

Fourth, the opportunistic economic model should be abandoned and be replaced by a value-creation economic model which will seek to raise the competitiveness of the private sector through technology, innovative entrepreneurship, scientific management and export orientation. The instruments are also well known: institutional reforms, simplification of bureaucratic procedures, tax incentives, investment in research and innovation, and strategic partnerships. We should recognise that the 50,000 unemployed people, over 10,000 of them with university degrees, is a huge waste of resources and a brewing social problem and take action to engage them in productive activity, ranging from voluntary social work to starting their own business. Here we can take a page and a helping hand from Israel. Provide retraining and retrofitting of skills, create start-up incubator angel funds and venture capital, and a system of business coachers and mentors.

Fifth, we should rediscover the work ethic and the ethical values of our forefathers, and abandon our generation’s culture of trying to profit from connections, trading influence, kickbacks, nontransparent procedures, and exploitation of other peoples’ troubles or practices of dubious legality. The new president and government can do a lot to help dislodge the mentality of easy profit at the expense of fairness and integrity as well as the mentality of easy life at the expense of the taxpayers. The instruments are also well known: transparent and merit-based hiring and promotion procedures, criminalisation of trading influence (rousfeti), strict implementation of the laws against corruption, money laundering, tax evasion, and the revolving door between the public and the private sector, among others.

Lastly, but perhaps most importantly, the educational system must come under scrutiny for having become the incubator of the anti-meritocracy, anti-creativity, anti-innovation, and anti-entrepreneurship mentality and culture and the hotbed where the seeds of questionable morality and of the ethical failings we daily witness, have been planted. Nothing short of re-inventing and re-founding our educational system, from kindergarten to university, on solid ethical grounds and moral values, on critical thought and creativity, and on innovation and entrepreneurial spirit will work to get us firmly out of the current muddle. The transformation of the current centralised public educational system into a system of autonomous public schools is a first step. This should be a priority for the new government.
Will the new president bite the bullet on these tough issues and take a stand that will bring about the transformation of our governance, our economic model and our culture and mentality to give the country a new beginning? Or, will it be more of the same we lived through for the past fifty years: appointments and policies to satisfy the many suitors and vested interests that coalesce around each presidential candidate to share the spoils of power? The legacy of the new president, the international image of the country, and the wellbeing of its people rest on the answer to these questions.