Monday, July 23, 2012

The Troika is here...now what? (Cyprus Weekly article)


Good morning economists. For those who did not read my article in the Cyprus Weekly this past week, I have chosen to make it the post of the day.

"The initial inspection of the Cypriot economy by the Troika has now been concluded. Representatives from the European Commission, the International Monetary Fund and the European Central Bank, the three agencies which make up the Troika, have met with government officials, politicians and other key people and have drawn some preliminary conclusions. As of today, we do not have a clear picture of the measures that will be imposed on the Cypriot people. What we do have, however, is a government which is trying to convince us that it has the power to draw “red lines” or refuse recommendations by the Troika.

The government’s attempt to explain how the economic recession is the outcome of the failure of capitalism exemplified by the questionable investment decisions of the banking sector is a rather poor one indeed. How is this related to the dismal government budget deficit? How is this related to the fact that state owned enterprises are draining public funds? And how is this related to the record breaking unemployment level?

The government’s inability to borrow funds in order to prolong the inevitable, namely, the failure of the structure of government as we know it, is now evident. The austerity measures that will be imposed by the Troika in order to balance the government budget will be ruthless. Government spending must be reduced and government incomes must be increased. This means that the Troika will undoubtedly target the inflated number of job positions in the public sector while raising taxation. In the midst of the worst recession in the history of the nation, these measures are a nightmare. In the days that will follow, many of us will wonder who or what is to blame for the current situation. 


 Instead of arguing whether or not an inter country loan would be more acceptable if it came from USA instead of Russia, behavior which is reminiscent of the Cold War years, it is best to work collectively to restructure the economy. There is an immediate need for private investors to enter the public sector, not only to inject private funds, but to take corrective measures to increase productivity. The sale of Cyprus Airways, would be a good start.

There is also an immediate need to reduce unemployment. Despite the objections of the labor unions to discuss the CoLa with the Troika, we cannot overlook the fact that when the wage rate is sustained over the amount determined by the market forces, this leads to unemployment. This is especially evident in state owned enterprises where wages are highly inflated and do not represent the true productivity of labor. I am afraid that pay cuts in the public sector are unavoidable.

How do we proceed, you may ask. I do not think we have a choice. The government will negotiate the conditions of the loan. Hopefully, the negotiations will be in the best interest of the Cypriot people. In the end, inviting the Troika may not be a bad thing afterall. Since our government is unable to handle the economy, let’s leave it to the people that can. Sad, but true!"

Have a nice day!

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