Allow me to travel back in time, exactly two and a half years ago, when during my first days in office I received an invitation to visit Brussels to discuss an unavoidable financial rescue package for Cyprus.
We were well-aware that the economy was running into trouble.
The financial sector had run an unsustainable credit boom for more than a decade, which fueled a property and consumption boom.
The 2 major systemic banks of the country had already absorbed an Emergency Liquidity Assistance (ELA) from the European Central Bank exceeding 70% of the country’s GDP. The blow of the decision to impose a haircut on Greek sovereign debt caused losses to our banks amounting up to 25% of the GDP. The Cypriot banks were on the brink of collapse.
There was also a severe fiscal crisis. The public reserves were literally on the edge of exhaustion. The economy was cut off from the markets since 2011, and was still running excessive deficits. Without a program in place, we were counting days for the country to become unable to finance its own needs. To default.
The structural weaknesses of the Cypriot economy were also exposed by the crisis.
The economy was already in recession and unemployment had increased 4 times, from 3.5% to 16.6%, within the last 5 years, reaching its highest historical levels.
The Brussels meeting was scheduled to take place just two weeks after the election-day and the official reports revealed a situation far worse than anyone had expected.
The country was faced with an imminent economic collapse, comparable in its magnitude to nothing since the 1974 Turkish invasion.
This was the time of Cyprus’ Great Recession and it was too late to request an election re-count!
The signs from Europe were not encouraging. It was obvious that the euro-area countries were determined to take a very harsh stance on Cyprus; a small and non-systemic country, with just 0.2% of the Eurozone GDP.
Having initially misdiagnosed the causes of the crisis, they were determined to tighten the economic governance of the Eurozone. Cyprus could serve either as an example for other countries or even as an experiment for the eurozone’s future policy design.
To avoid the upcoming Armageddon and considering that the second largest systemic bank had already reached the point of no return, we had to adhere to an unprecedented and still questionable Eurogroup decision, which included a severe haircut of bank deposits.
At the same time we swiftly agreed on a necessary program of economic reform and fiscal consolidation.
With strict capital controls in place, the speculation amongst economists was that the program came too late; there were voices, both internally and internationally, that Cyprus should default; that we should leave the Eurozone or even the EU.
But Cypexit was not an option for us. It was not easy but we had to make this program work.
Ladies and Gentlemen,
Just two and a half years later, I stand before you and state with confidence that we expect a smooth and successful completion of the program with the next few months.
Most importantly, I can proudly present Cyprus as a success story of economic reform.
We are emerging stronger from the crisis and we can be very optimistic for the future.
Cyprus has officially exited recession, and is registering growth as of this year. We are on the road towards full recovery:
– With a restructured and fully recapitalized banking sector and with a strong presence of major US investors like Wilbur Ross and Third Point.
– With the fiscal imbalances fully addressed; Without increasing taxes and without making socially painful budget cuts.
– With radical structural reforms undertaken
– With Cyprus returning to the international markets much earlier than any other program country.
Over the past two years we have completed 7 successful program reviews and our international lenders have repeatedly praised Cyprus for its continuous economic improvements. But what we actually achieved was more than just implementing a difficult program.
– We have maintained one of the most attractive tax regimes in Europe confirming the country’s reputation as an excellent business destination.
– The country’s profile as a transparent international centre was further enhanced by joining the FACTA list.
– New double tax treaties and other international agreements have been concluded.
– Our comparative advantages are further enhanced and new productive sectors of the economy are on the rise.
– The successive downgrades of the economy by the rating agencies have been succeeded by successive upgrades.
– The yields of the Cypriot Bonds are now at a level lower than in 2011.
– Capital controls were lifted much earlier than anyone had expected.
– Foreign investors were encouraged to invest in key sectors of the economy, including tourism, shipping, marinas, energy and hopefully very soon the ports and a casino mega project.
The “doomsday” scenarios for Cyprus have been replaced by praises; “Emerging stronger from the crisis”, “a small miracle” and “the unexpected resilience of Cyprus” are just a few of them.
Ladies and Gentlemen,
We had to take very difficult and unpopular decisions. But thanks to the hard work of our people Cyprus is entering a new era of growth and prosperity.
Most importantly, it is entering an era of sustainable prosperity; not a cyclical prosperity that starts with a boom, but inevitably comes to a bust.
Based on “responsibility”, so that never again we would have to rely on third party “solidarity” or painful and conditional bail-outs.
Our success is attributed to the implementation of our own ambitious reform-agenda, which upon completion will significantly enhance the competitiveness and the growth potential of our economy.
Many reforms are either concluded or are at an advanced stage of implementation, including
– A pension system reform
– A bold welfare reform which includes streamlining the number of benefits, better targeting, and the establishment of a Minimum Guaranteed Income for all those in need.
– A comprehensive public administration reform including a reform of the wage-bill.
– Labour market reforms
– A tax administration reform
Other critical growth-enhancing reforms, have been already initiated; an ambitious privatizations program, a digital strategy, and a judicial reform. We are also working on improvement of the business environment and we intend to transform our bureaucracy from a red-tape to a red carpet for investors.
It is the full implementation of our reform program that will lay-down the foundations for sustainable growth in the long run.
Ladies and Gentlemen,
Allow me to refer to the theme of this discussion. What lessons can we learn from the crisis?
The first lesson is that delays and indecisiveness involve a very high, economic and social cost. Many of our economic problems were caused by delays, postponement and inactiveness. By refusing to acknowledge the economic realities or by not taking measures in anticipation of a less painful solution we only cause the situation to deteriorate. The economic developments are rapid, in particular when credibility and confidence begin to erode and the downturn may take a geometrically negative spiral effect.
From my experience I reassure you; action in these areas is not easy.
Correcting this situation inevitably involves political cost, and requires courage and determination. But economic developments cannot be put on hold by politicians. As political leaders, our job is to take preventative or corrective measures in a timely manner and this should be the service we should offer to our countries.
The second lesson is that promoting structural reforms works. Even in the short-term.
It is universally accepted that the full benefits of structural reforms will are reaped in the long-term, and as far as Cyprus is concerned well after the term of my government.
Nevertheless they are also important in the short-term for one single reason:
They act as a catalyst for the restoration the country’s lost credibility; the restoration of confidence. And as you all know, the economy is all about confidence and expectations.
Investors, entrepreneurs and consumers, all expect macro-economic stability and a long-term framework where they can create sustainable economic activity without distortions.
In Cyprus it was this loss of confidence that sparked a negative spiral of events; with the banking sector losing deposits and capital; the government being cut off the markets; the investors being unwilling to invest; consumers unwilling to consume and entrepreneurs willing to fire.
To regain credibility and trust requires action and real reforms. It requires Commitment and determination.
We did not just implement but we actually took ownership of a program of fiscal consolidation and structural reform and we won the uphill battle of restoring international confidence.
Our quick reaction to the crisis and the frontloading of a reform strategy delivered.
And our experience goes in line with that of other countries, such as Latvia and Ireland which have seen better outcomes than countries that have applied a more reluctant approach.
A third lesson is that the perception that fiscal consolidation always leads to deeper recession and rising unemployment is false. We can be more productive by ensuring that fiscal consolidation and economic growth go in hand.
Economic recovery or growth is a structural issue and does not always require continuously increasing public expenditure.
For instance, by placing a leash on public expenditure we were able to avoid the need for imposing any new taxes. And maintaining a stable and competitive tax regime is a key element for investors’ confidence and success.
Ladies and Gentlemen,
I believe that Europe learned its lesson and is succeeding in changing itself as it did many times in the past. This is why the European project serves as a guide for all.
The success of the 60 year old European project, despite its difficulties, is a result of the creation of interdependencies through institutional, legal, and most importantly, economic and market means.
It was the establishment of the four fundamental freedoms and of free competition; the abolition of borders, the peaceful cooperation through trade and voluntary exchanges; It was the real application of the principle of subsidiarity.
It is upon those exact principles that we aspire to evolve the Republic of Cyprus into a federal union in the context of a resolution of the 40 year old Cyprus Problem.
A solution that will reunite the country, its people, the economy, and will establish good relations with Turkey.
A solution that will comprise all the parameters conducive to economic development, business and investment; regional stability, and open markets. With none of those parameters being obstructed by political barriers. A solution that will end the rapid alteration of the demography of our country.
This is what we are currently negotiating with our Turkish Cypriot compatriots.
To find a solution based on those exact principles; the principle of subsidiarity where all problems would be solved at the lowest level possible; the basic freedoms; the European law and the new European structures in place that will guarantee the viability of a European, Federal Cyprus.
With the EU now being a more active player, we will continue contributing constructively at the negotiating table.
We fully acknowledge the challenges and difficulties that lie ahead. But our responsibility towards our citizens is to do our best to succeed, as the solution can act as a catalyst for the economic development for the decades to come. With huge potential benefits for many sectors of the economy; Energy, Shipping, tourism, or transport are just the most obvious.
If we relieve Cyprus of all the political barriers that prevent the full exploitation of its unique geographical position, we will allow it to utilise its full potential.
The solution of the Cyprus problem will be the most significant growth reform that we can achieve. A European solution that will benefit Cyprus, Europe, and Turkey as a constructive neighbor. Turkey should recognize both the prospect and the reality and facilitate the solution of this long-standing issue.
Ladies and Gentlemen,
Cyprus is at the turning point of history and is addressing all the big strategic questions of the future.
The gas reserves discovered within our Exclusive Economic Zone but also in our neighbourhood, worth billions of Euro, are destined to transform Cyprus into an important international energy hub.
Cyprus has what it takes to become an important gas supplier and energy hub not only for the neighbourhood but for Europe itself. And this is why we are following a regional, integrative approach in our foreign policy orientation.
It is only by improving our relations with all of our neighbours, by building bridges, by bringing them together that we can truly utilise the comparative advantages in natural resources that our region has been blessed with.
That’s why we will continue building bridges with our neighbors and we will step-up the efforts to re-unite our country.
Within this framework our relations with the United States are of a strategic importance. Besides the significant strengthening our diplomatic relations we are also working on building more tangible economic relations. A bilateral US- Cyprus dialogue is in progress addressing many issues of economic cooperation. We have seen the first significant US investments in Cyprus, and will try to facilitate more!
*** Excerpts from President Nikos Anastasiades intervention at the Brookings Institution, Thursday, September 24, 2015