While the government is to appeal an Administrative Court ruling that deemed salary cuts to civil servants pay in 2012 unconstitutional, economists fear that developments could derail Cyprus’ fiscal policy and open the door to a second bailout.
Cyprus President Nicos Anastasiades said the government will appeal the court’s ruling and is ready to promote constitutional changes or invoke EU directives among other measures if the Supreme Court validates the decision.
Talking at the civil servants union PASYDY’s 56th Annual Conference, Anastasiades responded to calls from PASYDY to respect the court’s decision, stating that the government fully respects the process but will appeal the decision and ask for a postponement of execution.
Anastasiades argued that the government’s decisions were taken in the name of saving the country’s economy and wondered whether the court had taken into account the doctrine of necessity introduced to Cypriot legislation after the 1974 Turkish invasion.
President Anastasiades argued that harsh austerity measures affecting different layers of society such as the public servants’ and the banks, had to be taken.
“As a result of the measures taken, the government is now in a position to adopt measures to help vulnerable groups, such as introducing the Minimum Guaranteed Income and gradually increasing low pensions”.
The Administrative Court ruled that pay cuts imposed on Cyprus civil servants as part of an austerity drive in 2012 are unconstitutional, a decision that could cost the state a billion plus euros in compensation.
The court said a pay rise freeze, a 3% contribution to pensions, and a reduction in civil servants pay was in violation of article 23 regarding the protection of the right to property. These austerity measures were imposed by a cash-strapped government that tried reign in debt as the economy went into meltdown.
PASYDY Secretary General Glafcos Hadjipetrou said if the court’s decision is upheld by the Supreme Court, it will only see those civil servants (around a 100) who took legal action against the government receiving retrospective compensation.
However, if the case sets a precedent, it is not clear how many other public sector workers will go ahead and take legal action.
Economist Yiannis Tirkides believes the court ruling was “irrational, unethical and difficult to comprehend”.
Irrational decision
“Defining wages as private property and claiming unconstitutionality on the premise that the constitution protects private property is a matter of case law, not of the constitution,” Tirkides told the Financial Mirror.
“The ruling on its own is totally irrational. In 2012 the public sector was in a crisis, having no access to markets and a budget that was thus unfundable,” he added.
Observers fear that the government may find itself cash-strapped once more, turning to international lenders, essentially for another bailout as in 2013.
Another economist Chris Savva told the Financial Mirror, that although the government has a good chance of overturning the court decision, he feels that the country should brace itself for seeking another international loan.
“Currently the government is said to be saving some EUR 200 mln as a result of cuts introduced in 2012. If the government has to pay off more than the hundred people who sued the government, then we are heading for a recession, with lenders knocking at our door,” said Savva.
The estimated total compensation cost for all public sector workers is EUR 2.5 bln while restoring the payroll to pre-2012 levels immediately would add an additional EUR 1 bln burden to state coffers.
The government has an agreement with trade unions to restore wages to pre-2012 levels gradually by 2022.
Savva considers it a certainty that the government will have to compensate retired civil servants, as the EU has already ruled that pensions are considered a property asset, which is to be protected.
“In any case, the public debt to GDP ratio will be affected,” said Savva.
“The problem is not so much whether the government will have to compensate a number of people affected but it rather lays in the mentality of governments in Cyprus who are not keeping a tight lid on state coffers, giving in to a series of demands, especially from employees of the wider public and quasi-state sector,” he added.
Cyprus Employers and Industrialists’ Federation (OEB) fears that the decision may well derail the country from its fiscal course, with a worst-case scenario seeing the government compensating all civil servants for ‘unconstitutional cuts’.
Lena Panayiotou, head of OEB’s Labour Office, told the Financial Mirror that if the decision is upheld then public sector salaries will have to be restored the following day, with final cost unknown. She said the government has already started reinstating wages as part of an agreement with unions.
The government will have to sit down with public sector unions to find a solution within the legal framework, having in mind the agreement between them to restore wages by 2022.
Panayiotou said that even if a new bailout was not needed, the government still has to come up with a substantial amount of money, most likely by introducing new taxes, which will take its toll on citizens.
“Moving forward, the state needs to adopt ways to protect itself from such fiscal risks. All parties involved will have to come together and push for the restructuring of the civil service. The relative legislation proposals have been before the house for years now.”
Panayiotou said that moving forward with the reform package will save the state tens of millions of euros. She noted that the public sector will become more efficient doing away with the high cost of overtime which is also considered, a threat to the country’s fiscal policy.
“Although not as serious as this issue, overtime is still threatening to derail the state’s fiscal planning.”
According to Ministry of Finance data, spending on overtime put in by public servants reached EUR 82.1 mln in 2018 (from EUR 74.7 mln in 2017), with most of it going to permanent staff.
Spending on public sector overtime in 2018 was the highest since 2013.
In total, from 2013 to 2018, public servants were paid EUR 403.2 mln for overtime work. The government’s cost for overtime dramatically dropped in 2014 (EUR 55.6 mln) and has been on the rise since 2015.
Agreeing with OEB that the state needs to find ways to protect itself against such threats, Fiscal Council president Demetris Georgiades said that the state before going ahead with reforms should have studies made to determine what each civil servant should be paid.
He said this can be done by measuring the necessity of each position compared to what is being paid in the rest of the EU for the same services.
Although not particularly concerned over the court’s decision, as he finds it likely to be overturned by the supreme court, Georgiades added another aspect το the already thorny matter.
“The lawsuit was filled in 2012, it took the courts 7 years to rule on the matter, and the issue is not over yet as the government is to appeal. This certainly adds to the already negative impression foreign investors have regarding our juridical system. A troublesome justice system is a turnoff for investors,” said Georgiades.
