LSE Cyprus conference: competitiveness, banking sector, energy

Competitiveness, the banking sector and the future of the newly found natural gas dominated debate at the LSE conference on the economy of Cyprus held in London last Friday.
The conference, entitled “The Cyprus Economy at a Time of European Uncertainty: Managing Reform & Sustainability”, was organised by the Hellenic Observatory and the Research on South Eastern Europe unit (LSEE).
High-profile speakers among the 15 who spoke included the Minister of Commerce, Industry and Tourism, Praxoula Antoniadou-Kyriacou, the Nobel prize-winner Chris Pissarides, and the Managing Director and Head of Europe, the Middle East and North Africa for Standard & Poor’s, Moritz Kraemer. Standard and Poor’s is the agency that has just downgraded Cyprus to junk.
Kraemer spoke on condition that he would not be quoted. But suffice it to say that delegates were left with the impression that regaining Cyprus’ investment grade status will take a mix of good policy-making both at the Cyprus and the eurozone level.
There was much discussion about the competitiveness of the Cyprus economy, with some speakers noting symptoms of decline, such as a persistently large current-account deficit and an increase in the real effective exchange rate measured against unit labour costs.
Academic Bernard Casey expressed concern that Cyprus’ demographic profile was a ticking time bomb for the future if issues such as public-sector pensions and pension ages were not quickly reformed.
These issues led to a long discussion about the wage-indexation mechanism (COLA), with some arguing that the rapid rise in unemployment and increase in foreign labour pointed to its non-viability. On the other hand, Antoniadou argued that, in a high value-added economy, one can never compete on price alone, therefore the focus should be on improving quality.
Speakers noted the need to support tourism through simple measures such as pavements without cars and parks that are kept clean, as well bigger items such as marinas. It was noted that professional services offered by accountants and lawyers have now surpassed tourism as a services export.
In view of the exposure of the banking system to both Greek sovereign debt and the Greek private sector, there was much discussion about contagion from the eurozone’s woes. One banking expert suggested that Marfin Popular Bank would only meet the European Banking Authority’s capital requirements by finding a strategic investor—a polite word for a takeover.
On a more positive note, the natural gas find was seen as an opportunity for growth and diversification, although academic Rick van der Ploeg also warned about how to avoid the “resource curse”. Typically human and physical capital is diverted to the energy sector at the expense of the rest of the economy and governments start to get into bad spending habits that are politically difficult to break when the resources dries up.
The conference ended with a call by the Greece contributor for the Economist Intelligence Unit, Robert McDonald, for political leaders to recognise how solving the Cyprus problem would greatly leverage gas resources and help Cyprus avoid falling into the same fate as Greece.