The European Union, the International Monetary Fund and the international media blame Cyprus’ banking practices as the main cause of the crisis… and made sure, that the economy of Cyprus was ruined in just a weekend!!! Manically, German and French mainly politicians, argued that Cyprus is harboring criminal money, that Cyprus is an offshore tax haven and a money laundering center! For the record, Cyprus is an EU low tax jurisdiction not an offshore financial center…
And it makes one wonder… Have all the so far EU, IMF and OECD reports and assessments on Cyprus been false?
Why is then Cyprus on the OECD’s white list of jurisdictions – complying with the global standard for tax co-operation and exchange of information? How come the OECD financial task force in its last report (and in others before it) stated that Cyprus complied with all forty-nine of its recommendations to combat money laundering (interestingly Germany failed to comply with five of them)? How come the Council of Europe awarded Cyprus with high marks on its last MONEYVAL September 2011 money laundering report? And, how come the IMF has been forecasting in its infamous last IMF staff report that Cyprus will have a balanced budget by 2014?
Some economic (historical) facts about Cyprus:
- The underdeveloped economy, inherited from British Colonial Rule in 1960, had been transformed into a modern economy, with dynamic services, industrial and agricultural sectors and advanced physical and social infrastructure.
- The Turkish invasion of 1974 inflicted a serious blow to the Cyprus economy and in particular to agriculture, tourism, mining and quarrying: 70% of the island’s rich producing resources were lost, the tourist industry lost 65% of its hotels and tourist accommodation, the industrial sector lost 46%, and mining and quarrying lost 56% of production; the loss of the Port of Famagusta, which handled 83% of the general cargo, and the closure of the Nicosia International Airport, in the buffer zone, were additional blows.
- In 2008 Cyprus was classified by the IMF amongst the 32 advanced economies of the world, characterized by robustness and macroeconomic stability, a record of successful economic performance, reflected in rapid growth, full employment conditions and external and internal stability.
- The average annual rate of growth between 2004 and 2008, prior to the Global Financial Crisis, was 4.2%, while inflation stood at 2.5% and unemployment at 4.4% over that period.
- At end-2010, GDP was at 0.8% (-1.7% in 2009), inflation at 2.4% (0.3% in 2009) and unemployment at 7.1% (5.4% in 2009).
- At-end 2010, Cyprus was classified among the high-income countries with a standard of living that was higher than most other European Union member-states(>98% of the European average) and the performance of the economy compared favorably with that of most of the wealthier other EU countries.
- The Cypriot maritime registry is the tenth largest in the world, one of the largest in the EU, and Cyprus is the biggest third-party ship management center in the EU. The
- Cyprus Registry is one of the only two “Open Registries” within the EU, estimated to constitute 25% of the whole EU “fleet”.
- According to the latest World Investment Report of UNCTAD, Cyprus is one of the most attractive locations for foreign investments, ranking among the frontrunners of the world indicating both high FDI performance as well as high FDI potential.
Is this the profile of a country that is not productive or hard working or not reliable as some “experts” have recently asserted?
Yes, it is a fact, that the Cypriot economy became overly reliant on the banking sector, and Cypriot bank portfolios were not sufficiently diverse. That the resolution of Laiki Bank (country’s second largest bank) should have been taken up long ago and that the Bank of Cyprus (Cyprus largest bank) made disastrous bets on buying Greek debt at a discount and lost $2 billion as a result…
Yes, the public pension system should have undergone restructuring, i.e. revise contribution rate and retirement age, base benefits on career average not on final salary, index pensions to the CPI, etc.
Yes, automatic salary increment should have stopped a long time ago, public sector wages should have been contained and the size of public employment should have been reduced – public sector employees in Cyprus receive an estimated 30% higher salaries than those in the private sector!
Yes, C.O.L.A. should have been abolished… It causes large increases in real wages and deteriorates the competitiveness of domestic companies… it undermines flexibility and competitiveness as it impedes relative wage adjustments across companies and sectors in line with productivity differentials… it imparts inertia to the public sector wage bill… makes it more difficult to reverse the excessive growth of public sector wages and salaries…
Yes, governmental and semi-governmental sectors should have enforced a more efficient salary system based on merit and performance – employees there should not have gotten jobs for life despite performance – and trade unions (that remain extremely influential and had been pampered by each and every government in power because of political cost and own benefits) should not have been influencing management decisions to the extent that they did.
And yes, the Cypriot government, leadership and politicians should have put their personal and political party interests aside, and should have reacted to market signals a lot earlier than they did.
But did Cyprus do such terrible things that made it deserve this horrific fate? Is it only Cyprus’ fault? Is Cyprus the real problem? Is the Euro the real problem? What about the EU policymakers? Is their incompetence part of the problem at all? Are we witnessing an EU policy game changer? What is to be expected next from the EU think tanks and policymakers? Could anyone guess? As the Euro crisis worsens going into its fifth year, would the EU cathartic and fragmented policy move from one country bailout to the next? Is the Euro, a grand, political project with no practical foundation – hence crisis after crisis, with the dominoes stretching far into the distance?
The big question seems to be focusing on systemic risk: To what extent does the collapse of an institution imperil the financial system of a country as a whole? Is there really sufficient systemic risk to warrant a rescue of a “country giant”, in the case of Cyprus the Bank of Cyprus? And if there is, why there was not sufficient systemic risk seen in rescuing Laiki Bank?
Could the inability of policymakers, to enforce current regulations by imposing stricter more complex ones, create a more chaotic, slow-reacting, bureaucratic, multilevel regulation system which will be at the expense of movement of capital and everything positive that comes out from it?
Note that now we have capital controls and withdrawal restrictions and de facto wealth taxes inside the Eurozone… where depositors were threatened and directly hit… is the concept of the Euro to exist in the same format? Are we going to observe the start of multiple versions of the Euro in the near future? The restricted one now observed in Cyprus and the so far unrestricted one for the rest of the Eurozone?
Do the problems really lie in entities that tried to take advantage of whatever conditions they operate under? Or does the real problem lie in the framework created by politicians and bureaucrats, preventing free markets to deal with excesses in the way the laissez-faire economic philosophy always does? Do we want the free market economic system to survive?
Is this version of democracy (where only majority rule is required, but where there is no longer a respect for personal negative rights) the right one for the EU to keep on following? What about human dignity? Shouldn’t all members of the EU be functioning under the same law? Why was Cyprus treated differently than any other ailing EU member state?
As the bloated welfare states begin to collapse under politicians’ inefficiencies, bigotries, populism-like behavior and irresponsible promises, crumbling value systems and unsustainable demographics… wouldn’t it be easy to convince more than 50% of voters that confiscating and stealing other people’s money is OK for the greater good?
Is it not what happened in Cyprus a clear step towards totalitarianism and suppression of individual liberty? Is this form of “EU democracy” a mean to the conquest of EU member states? Is this a new form of tyranny? EU tyranny? Is this what the European Union stands for? Is this the legacy as citizens of the world and Europe that we really want to leave behind? And if solid fundamentals are widened wouldn’t that lead to polarization in Europe?
The fate of Cyprus was basically sealed when the Troika revealed its first version of the bailout package!
Eurogroup President Jeroem Dijsselboem spread terror to Cyprus and the markets worldwide when he stated that the Cyprus “deal” is the new template… Mr. Dijsselboem said in essence that the EU will save the Cypriot financial system by destroying it… along with the rest of the economy of Cyprus… in essence he meant, if this experiment is successful then it will be used in the future, if it doesn’t, then who gives a damn about Cyprus…
But did Mr. Dijsselbloem think for a moment about what impact his so-called template surprise would have on financial markets? Did he consider, for example, that small and/or fragile banks in Portugal, Spain and Italy would face increased stress due to an exodus of funds now searching for safer harbors? Or depositors all over the Euro area would now have a strong reason to get out of European banks and the Euro, causing damage to both?
A bit later after criticism from EU partners and the ECB, Mr. Dijsselboem corrected his comments… Other EU officials hurried also to explain that what happened in Cyprus was a one off thing, that Cyprus is a unique case while Mr. Schaëble, the German Finance Minister, attempted to defend Mr. Dijsselboem’s comments… But then again ECB policymakers rushed to announce that Cyprus will be used as a model… Yet again, a bothered Mr. Juncker, the Prime Minister of Luxembourg, stated that Cyprus is not a blueprint, we cannot, he said give the impression that savings in Europe are not safe… So what is it? Are deposits in Europe safe or not? And if they are safe, why take such approach with Cyprus? Still remains to be understood, why Cyprus is such a unique case and what justified such approach?
In regard to the fate of Cyprus… with very little hope for any kind of immediate future it will more than likely fall into a depression… Hit by fiscal, financial, and wealth shocks… as the Troika demands further tax hikes and spending cuts in return for its €10 billion bailout loan… for another, its bail-in and capital controls will effectively kill off its financial sector and starve its people and businesses of credit… even worse, those people and businesses are going to need credit now more than ever after losing so much of their wealth in the bail-in…
In regard to the fate of Europe… well nobody knows… when it is obvious that the EU leaders do not know themselves…
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