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BY HARRIS SAMARAS
The epitome and the writing of the final chapter of the calamity of the economy of Cyprus commenced on December 14 with the approval by parliament of insufficient austerity measures that only scratch the surface and continued on December 15 with the national strike of the civil servants ordered by PASYDY (the civil servants labour union). What preceded December 14 was the lack of vision and inability of the government and political leadership of the island to tangibly explain to Cypriots and make them realise the obvious: that if Cyprus does not change it will suffer!
The austerity measures to be adopted by the government will buy Cyprus a few months, maybe a year, but will not solve the systemic problems of the economy that contributed to the crisis. On the contrary, the approved 855 mln euro fiscal consolidation package (over three years) will force the economy to slow down even further to complete stagnation, as private consumption growth, the main driver of the expansion in the past, will evaporate completely and will compel households to zero credit growth. Over and above the leveraged balance sheets and the rising unemployment (8.2% and 24% with ages under 25 as at end-October 2011), incorporated and absent components in the package demote growth and productivity and discourage FDIs.
Cyprus cannot be productive or competitive when the COLA defeats each and every purpose for competing; Cyprus cannot aim for excellence when entrepreneurship and innovation is “massacred” by a system that is not based on merit and performance but instead promotes mediocrity and injustice. Freezing the COLA for a period of time is only an interim measure; the COLA must be abolished immediately! Simply, apply a fair formula to incorporate the COLA into the salaries of the public servants and base future increments on performance.
The fiscal pressures generated by the public pension system and the disproportionate to the more productive private sector public wages are disastrous – as population aging and rising dependency ratios feed through to large increases in pension outlays and overbearing and unfoundedly increased public salaries exacerbate public finances.
Cyprus has the largest public sector payroll in the Eurozone as a proportion of output (15.4% of GDP at end-2010) which along with social benefits they consume an immense 45% of total generated government spending. Even after the recent reforms, the pension plan remains one of the most generous by international standards. The public pension system has to undergo restructuring, i.e. revise contribution rate and retirement age, base benefits on career average not on final salary, index pensions to the CPI, etc.
Also, public sector employees receive an estimated 30% higher salaries than those in the private sector. Automatic salary increment must stop, public sector wages must be contained and the size of public employment must be reduced.
In view of these indisputable facts one can only wonder why the unions hold such a stance and one can only deduct that their behaviour is ignorant, irresponsible and anachronistic. What else can it be? Could it be that they put their own interests before the wellbeing of all their members? Could it be that they desperately try to find a reason for their existence? Because, if they are, their actions are equal to the most despicable crime.
The labour unions must realise that unless they support the fiscal consolidation process unreservedly, unless the cancer is scraped to the bone and not just the surface, in a very short period of time their role will be diminished to obscurity. When their members (if drastic measures are not undertaken) in the very near future are laid off, one after the other, they, their members, will realise only too late that the labour unions were more than ignorant…
Note that the day Cyprus is forced to join the European Financial Stabilisation Mechanism (EFSM), that very same day Cyprus will stop being an international business and financial centre, Cyprus will not be allowed to have a privileged 10% corporate tax; even worse, Cyprus will not be deciding for its own future alone.
Bold corrective actions can set the stage for resumption of economic growth only if a spirit of collectiveness and pride is adopted. Will the labour unions give the example or not?
Harris A. Samaras is an economist and presently chairman and CEO of Pytheas, an international investment management organization. He has also worked with the Bank of America Group, Thomson Financial BankWatch and Moody’s Investors Service with expertise in the areas of investment and corporate banking, private equity and finance, risk management and business development. His research and publications range across practice rather than theory, economic and business thought, entrepreneurship and geopolitics. He has been an adviser to various governments, central banks, financial institutions and other corporates and has been a board member of multinational organisations.
