When the current President of Cyprus, N. Anastasiades, assumed office back in February 2013 he probably did not expect that in a few weeks’ time he would find himself in the middle of a “perfect [economic] storm”.
The crisis was evident as early as 2009, but it did not begin to really affect Cyprus until post-2011, especially after the Greek loan haircut in October 2011. However, the real effect of the crisis on the people of Cyprus was not felt until March 2013 following the bail-in agreement with the consortium of Cyprus’ international lenders, i.e., what has come to be known as the Troika: the International Monetary Fund, European Commission and European Central Bank.
Although the signs were present throughout the campaign, no one actually anticipated the avalanche that followed. Accordingly, the current President has failed to deliver a number of issues that he promised during his campaign. Two of the most important promises concerned his commitment that he would never accept a haircut on deposits and that he would not proceed with privatizations of publicly owned organisations.
Nonetheless, post-2013 presidential elections developments in the economy were dramatic. The final form of the Memorandum the government signed with the Troika destroyed Cyprus’ economic model overnight. The new Memorandum differed fundamentally from the memorandums that have been implemented in other south European countries in one crucial aspect: it provided for the ‘rescue’ of the banking system through the method of bail-in, i.e., with funds from shareholders, creditors and depositors of the two largest banks of the island, instead of external recapitalization (bail-out).
A scheme of privatizations of profitable public companies (e.g., the Electricity and the Telecommunications Authorities) and ports, contracting of public spending, further deregulation in the labour market and a reduction in the number of civil servants were also agreed. Additional structural reforms to improve competitiveness and alleged growth prospects were also agreed in an effort to rectify Cyprus’s financial problems.
However, the results have been frustrating. Overall, Cyprus’ economy as a percentage of the GDP declined by 7.7 per cent since 2013 registering the highest contraction since the Turkish invasion in 1974. As a result, public debt increased by 29.3 per cent of the GDP, up from 79.3 per cent in 2012 to 108.2 per cent in 2014, representing the biggest increase in the EU.
Various data testify to the social dumping Cyprus is experiencing, though they are not solely attributable to the memorandum. For example, unemployment increased from 11.8 per cent in 2012 to 16.1 per cent in 2014, whereas the net immigration rate was, for the first time, negative both in 2013 and 2014. The number of people at risk of poverty or social exclusion rose to 230,000 (27.4 per cent of the total population) and income inequality increased from 31 per cent in 2012 to 34.8 per cent in 2014 (Gini index). The non-performing loans have aggravated to such an extent that the banks and the Troika demanded the sale of these loans to third parties.
As was more or less expected, since March 2013 the bulk of political debates have concerned the austerity measures provided in the Memorandum. Under the strict surveillance of the Troika the government is trying to implement the Memorandum; however, this means that the President and the government must default on their promises. Although not a new phenomenon in Cyprus politics, it is scrutinized more intensely both by citizens and the media in recent years. Elected officials have no grace period any more.
Probably the most significant change in this new era (marked by the signing of the memorandum with the Troika) relates to issues of trust in political institutions, legitimacy and accountability. Legitimacy and political trust are crucial since political institutions as well as political actors can deliver as long as they enjoy the trust of their constituents. The core issue in sustaining the public’s trust is accountability and the ability to deliver on their promises.
Historically, Cypriot governments were able to meet their promises, at least considerably more than they have done in recent times. The economic crisis represents a game changer in this discussion. The current president himself justified breaking his promise that he would not impose a haircut on deposits, saying that ‘they [the leaders of the Eurogroup] put a gun to my head’.
Non-performing loans, strengthening the supervisory framework for restructuring loans, the issue of the sale of loans and the implementation of structural reforms and privatizations are currently amongst the most controversial issues. A couple weeks ago the Cabinet approved the privatization plans of the Cyprus Telecommunications Authority overriding the objections of all the trade unions, which staged a protest outside the Presidential Palace.
Essentially, since the enforcement of the Memorandum the elected government in Cyprus has been sidelined and the real government is now the Troika. This in turn raises issues crucial to the proper functioning of democracy in the country and which the political personnel –particularly the President – has to address in order to avoid an implosion similar to what happened in Greece.