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By Dr. Jim Leontiades
Cyprus International Institute of Management
A Euro exit by Cyprus today would bring major costs and hardship, not least in the form of a steep devaluation. There is also the matter of a small country attempting to go it alone. These are both key considerations which rule out a Euro exit in the foreseeable future.
The “foreseeable future”, however, does not extend very far. Who foresaw the situation this country is in today? Unforeseen events which can fundamentally change our situation are a real possibility. Future developments may make an exit from the Euro not only be desirable but necessary. Events outside our control could force or persuade Cyprus to exit. These could take a number of forms:
Euro zone break up: Despite some brave talk from its leaders, the Euro zone itself moves from one crisis to another. There is no real sign of economic improvement, just the reverse. Faced with continual economic recession, at some point members may have no choice but to leave. Such talk was until recently considered extreme or even eccentric. Today , even The New York Times asks in a recent article “Can European disintegration be reversed”? Notable economists and financial figures (e.g., George Soros) suggest that it cannot.
The members of the common currency would then have no choice but to fall back on alternative arrangements, for their currency, their banks, financial regulations, etc. All such provisions take time, in a situation in which very little time would be available. It is just for such complex, unforeseen situations, that companies prepare contingency plans. Plans that may never be used but which are a prudent preparation for possible future events.
Political change. The Euro zones’ austerity programmes and their disastrous economic results have given rise to new political parties whose political platform is based on a Euro exit. One of the most powerful political parties in Greece is committed to exiting the Euro. As Greece falls further into recession, Mr. Tsipras’s Syriza is gaining votes. The big winner in Italy’s recent election was the “five star” party of Beppe Grillo a former comedian whose party is also committed to a Euro exit. Even in Germany, there is a new party based on severing ties with lazy southerners and returning Germany to the Deutsche Mark.
If such anti-Euro political parties gain power and there is an exit by Greece, Italy, or any other country, Cyprus might choose to follow, or not. But we should be prepared to make the choice.
New Troika demands: The troika will be back. Its future requests to the Cypriot government (and there will be many) are an unknown quantity. Will they be acceptable? For the time being we have to proceed on the working assumption that they will. But recent events have shown that we cannot count on the good sense and understanding of the Troika. We should not rule out the possibility of some future outrageous demands that may not be acceptable. If that is the case, an alternative plan should be ready.
Cyprus Gas: Future gas discoveries by Cyprus would have a bearing on our willingness and ability to exit the Euro. They would have a positive impact on both the exchange rate problem a departing country would face as well as its geo political position.
Whatever the cause and whatever the timing – Cyprus should have as a clear objective staying within the European Union, even if it leaves the Euro. Here again, this will require careful preparation.
