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BY DR. JIM LEONTIADES
CIIM, The Cyprus Business School
While many of the world’s economies are showing signs of emerging from the recent financial crisis, there are a number of exceptions. Unfortunately, Greece is among them. Greece, in particular, has deteriorated to the point where it threatens the stability of the Euro and hence the economy of the 16 Eurozone countries. The country has lost credibility with the EU Commission as well as the international financial rating agencies. This translates into higher interest rates which the country has to pay to service its massive debt. Default, in effect a declaration of national bankruptcy, is not out of the question.
How did Greece arrive in this position? The main features behind its economic decline are all too obvious. A bloated civil service with job security and privileges not enjoyed by many Greek citizens. Strong unions who have little contact with economic reality. A weak government that found populism and “bread today” an easier alternative than confronting the many vested interests.
While some countries have moved into positive economic growth (USA, China and a number of European countries) the situation in Greece is moving the economy in just the opposite direction
It is not that the Greek politicians did not perceive where the country was heading. Unable to implement reforms that were clearly needed and perceived, they took the easier path.
The situation in Greece is one which threatens the very survival of the Eurozone. The exchange rate of the Euro has moved sharply downward since the Greek situation hit the headlines. Of course, it is not only Greece which is on the critical list. Spain, Italy, Portugal face analogous situations.
CYRUS IMPACT
The economic situation in Greece will, of course, affect Cyprus. We see here our own possible future. In a number of key areas, Cyprus is following all too closely in the economic footsteps of Greece. The government here has given up all hope of controlling the public sector (in this respect it is no different from previous governments). Pious wishes for a more egalitarian society have to eventually face some hard realities.
There is nothing egalitarian with the way the burden of the financial crisis is being shared in Cyprus. Crisis or no crisis, the public sector here grows and prospers. It is the private sector, particularly tourism and construction, that bear the full brunt of the economic decline.
In other words, it is the productive sectors of the economy which suffer and shrink, while the bureaucracy which lives on their earnings, thrives. This, and the other elements noted above, is part of the same recipe which has brought Greece to where it is.
VIRTUES OF DEVALUATION
The situation in Greece has reached the point where even the very concept of a Eurozone common currency is now being challenged. Yes, the Euro has saved countries (particularly smaller countries like Cyprus) from a painful devaluation, but at what cost?
In the past, Greece would have met the current crisis with a devaluation. Painful it might have been – but unlike the current situation, a currency devaluation would also have quickly introduced the basis for a strong economic recovery. It would have immediately made Greek tourism and exports more competitive. Foreign investment would have been encouraged, foreign imports discouraged, jobs created. In short, a devaluation would breathe life into the productive sectors of the economy.
Within the Eurozone there is of course no devaluation. The fact that the Euro is now probably the strongest major currency in the world economy merely aggravates the situation. Greece must now struggle to pay off its huge debt (nearly 100% of GDP) within the context of a low growth, stagnant economy. Higher taxes in one form or another are a virtual certainty. The sort of civil unrest which has all too often characterized any attempt at economic austerity measures in Greece is an all too likely possibility.
PRICED OUT OF THE MARKET
Here in Cyprus we also see that our tourism and construction are in serious trouble. This applies as well to other areas of the economy. Nor is there the prospect of a near term improvement. Our prices are still too high. Even though it has slowed economic activity, the financial crisis has left many prices largely unaffected. High prices together with strong labour unions mean that the cost of doing business in Cyprus is not only high but resistant to downward pressure. This refers particularly to hotels and other tourist establishments. Cyprus is no longer competitive in tourism (and elsewhere). Tourists are shifting to countries outside the Eurozone, such as Turkey and Algeria. The sort of lower prices and subsequent quick recovery that a devaluation of our currency would bring is out of the question.
It is becoming more evident that, painful though it is, devaluation provides a needed adjustment and a quicker return to competitiveness for economies with weak governments.
