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BY DR THEODORE PANAYOTOU
Few doubt that Greece is bankrupt all but in name. Unfortunately, the worst is yet to come. If we, in Cyprus, do not want to have the same fate in the midst of our European Presidency we should do two things: first, understand why Greece has reached the verge of complete bankruptcy; second, avoid making the same mistakes by taking the right measures and promptly, even though we have already lost valuable time.
Two reasons led Greece to its present predicament. First, it was the delay in taking drastic measures to correct distortions accumulated over decades, along with measures to increase productivity and recover the lost competitiveness of the economy, leaving thus the country to slide into the EU support mechanism.
The second reason are the punitive austerity measures imposed by the Eurozone/IMF troika in exchange for the rescue of Greece, a treatment that has proved worse than the disease: new heavy taxes and deep expenditure cuts which killed the economy in order to save it. It's like someone going to the doctor with heart problems and the physician prescribing a strict diet and a daily Marathon-long run to strengthen his heart since the cause of disease is diagnosed to be his overeating and his sedentary life for the last thirty years. Not only will he not manage to complete his first Marathon run, but will fall into a coma halfway.
Therefore, let us act promptly and correctly if we do to not want to end up in the intensive care unit of the Euro zone and the International Monetary Fund,
because, as demonstrated by the experience of other countries like Argentina, it will take us a decade to recover. Taking only the budgetary measures that the EU and IMF recommend, i.e. deep spending cuts and additional taxes, would lead us with mathematical precision into the arms of the Troika as growth would go negative and the budget deficits become even bigger and unserviceable, just as it happened in Greece. The IMF and the EU may be right in their diagnosis of the problem but their prescription is incomplete focusing exclusively on the symptoms and ignoring completely the side-effects that proved disastrous in the case of Greece.
Whatever budget deficit reduction measures we adopt we must couple them inextricably with compensatory measures to maintain and increase demand for goods and services for both consumption and investment thereby increasing rather than reducing economic activity and hence the revenue of the state making the budget deficit smaller not bigger.
BOOST CONFIDENCE AND GROWTH
The right prescription should be that for every €1 from additional taxes, to save €2 from spending cuts and create €3 in new economic activity. Thus, we would not only offset the negative impact of new taxes and cuts on market demand and economic activity but we would be boosting market confidence and economic growth while increasing tax revenues and reducing unemployment. This is the only way to get out of the crisis in months rather than years and avoid the deep recession we see in Greece.
As an economist, I urge both the government and the opposition not to get lost in the black hole of the budget deficit and let the economy go from bad to worse in a vicious cycle of cuts and taxes, reduced economic activity, loss of state revenues and more cuts and more taxes that would push the economy deeper into recession.
How can we both close the budget deficit and stimulate economic growth without spending lots of money we don’t have and do it quickly? The measures required need only a modest amount of money and a lot of ingenuity and good planning such as imaginative self-financed incentives, legal and institutional frameworks, more flexible labour markets and removal of bureaucratic hurdles and disincentives that hamper economic activity and deprive people of employment and income and the state of tax revenue.
First and foremost we need to find immediate ways to increase productivity in the public sector. The wage freeze may be inevitable but deep salary cuts can be avoided if we take steps to increase public sector productivity which is pathetically low and acts as a brake on the private sector economic activity.
Because of the leveling of all performance incentives by rating all public officials as “excellent”, it is of utmost urgency to introduce a merit-based evaluation and other incentives such as recognition and reward to boost the productivity of civil servants as to assist rather than hinder economic recovery.
A second measure should be the restoration of confidence and optimism of citizens, both consumers and businesspeople which are at their lowest level in the last 30 years.
DEMAND AND ENTREPRENEURSHIP
To reverse this negative climate measures should be taken that will increase demand, liquidity and entrepreneurship. There are areas with huge potential such as medical, sports and conference tourism and educational and advisory services which have been floundering for years because of lack of legal framework and supporting policies and the infrastructure needed to materialize.
Our faltering construction industry could also be revived with a legal framework and a policy that would promote the gradual transformation of private and public buildings and infrastructure into energy-efficient structures saving millions in energy costs as the European Union directives demand us to do anyway.
We abandoned the effort to increase our industrial activity blaming our small size, our non-competitive salaries and competition from low labour cost countries such as China and India. But the huge success of industries like the award-winning companies of Medochemie and Enfoton, which export pharmaceuticals and photovoltaics to other EU countries, even Germany, showed that there are good export opportunities for Cyprus in high technology industries.
A third set of measures should aim to reduce the growing unemployment and the employment uncertainty that are slowing down demand and exacerbating the negative sentiment in the market. We must take immediate action to retrain the unemployed university graduates, for occupations with a future and the creation of business start ups and innovative products and services utilizing new technologies that not only employ themselves but also create jobs for others. For this we need strong and user-friendly incentives, including the creation of a venture capital fund.
A fourth measure is to privatise the semi-government enterprises such as the Telecommunications Authority, the Electricity Authority, and Cyprus Airways in order to limit the role and expenses of the state to matters of genuine public interest and stimulate competition and economic activity. As a byproduct of such a move, which will sooner or later become unavoidable, significant funds would flow to the state coffers that could be used for further measures to stimulate economic growth and regain our lost international competitiveness.
If we take these and related measures together with the budget cuts and limited tax increases, we still have the opportunity to escape the Damoclean sword of the EU/IMF support mechanism that entails a tough medicine and loss of sovereignty, and march into the EU Presidency with the pride that we managed our own problems and demonstrated a model that others in our position can emulate.
Dr. Theodore Panayotou, Director of CIIM and Professor of Economics and the Environment at Harvard University, served as consultant to the UN and to governments in the U.S., China, Russia, Brazil, Mexico and Cyprus. He has published and was recognized for his contribution to the Intergovernmental Committee on Climate Change won the Nobel Peace Prize in 2007.
