Blog Post

What comes after finance in Cyprus?

The prominent role of Cyprus's financial services is probably over anyway, irrespective of the actual content of the forthcoming agreement between the troika and Cyprus. I put together some simple tables showing the structure of the economy in Cyprus and in three other countries that suffered from massive banking crises during the past few years: Ireland, Iceland and Latvia (see a December 2011 policy contribution of mine comparing the adjustments of these three countries - "A tale of three countries: recovery after banking crises"). Here are some observations.

By: Date: March 24, 2013 Topic: Macroeconomic policy

The prominent role of Cyprus’s financial services is probably over anyway, irrespective of the actual content of the forthcoming agreement between the troika and Cyprus. I put together some simple tables showing the structure of the economy in Cyprus and in three other countries that suffered from massive banking crises during the past few years: Ireland, Iceland and Latvia (see a December 2011 policy contribution of mine comparing the adjustments of these three countries). Here are some observations.

1. Changes in output and employment

Let’s start with a comparison of constant price GDP and employment development in the four countries. GDP fell massively in Latvia and output loss was also sizeable in Ireland and Iceland. Note also that GNP fell much more in Ireland than GDP, as highlighted in a recent blogpost by André Sapir. Latvia and Ireland also suffered from massive employment losses. This is a bad omen for Cyprus. Iceland’s employment did not fall that much, but the significant exchange rate deprecation has likely contributed to this (see my policy contribution mentioned above).

GDP (at 2005 prices) and employment (2007=100)

Sources: Employment: Annual national accounts database of Eurostat for EU countries and the February 2013 update of AMECO for Iceland; GDP: AMECO for all four countries.

2. Structural changes in the economy

Keeping in mind the major collapses in Latvia and Ireland, let’s compare the changes in the structure of the economy (see the tables at the end of this post).

Cyprus: In 2012, the share of finance and insurance (of which about 90% is finance) was 9.2 percent in output and 5.1 percent in employment. Most likely these numbers are not as large as many people would expect. There were already major changes in the economy: the oversized construction sector (12.8% share in output in 2006) has already halved, and employment has also shrunken in this sector.

Ireland: Quite interestingly, the share of finance has not declined in output from 2006 to 2011, but remained broadly stable at about 10%. The employment share of the sector has even increased from 4.3% to 5.0% (there were 88 thousand employees in 2006, 99 thousand in 2009 and 92 thousand in 2012 in finance and insurance activities). Here too, construction has dramatically collapsed: its share in output was 11.1% in 2006, but a mere 1.7% in 2011. The shares of manufacturing and various services, including public services, increased in output from 2006 to 2011, while employment fell in manufacturing and increased in services. (Note: manufacturing is dominated by the pharma industry in Ireland; a sector using a lot of capital but few people, as I studied in a policy contribution in July 2012.)

Iceland: The share of finance has declined from 9.4% in 2006 to 6.1% in 2011 in output (employment data is not available). The shrinkage of the oversized construction sector was dramatic here as well (from 11.6% in 2006 to 4.3% in 2011). Manufacturing, fishing and certain services gained in terms of output share.

Latvia: The share of finance was not that high in 2007 (5.4% in output and 1.8% in employment), yet its output share has declined to 3.5% by 2012, while its employment share remained broadly stable. The share of construction has shrunken significantly both in output and employment. Industry and various services took up the lost share of construction and finance.

3. Summary

  • The role of financial services in Cyprus is not as high as perhaps commonly thought.
  • The experience of the three countries that went thought banking crises during the past few years suggest that major suffering may come in Cyprus as well, yet the output and employment shares of finance may not decline that much. (The latter observation would deserve further analysis.)
  • Construction contracted dramatically in the three crisis countries, and this process has also started in Cyprus.
  • Manufacturing and various services took up the lost share of construction in the three crisis countries.
  • The share of manufacturing is Cyprus is very low, 5.8% in 2012 output, while it was between 11% and 19% in the other three countries before the collapse. This suggests that the manufacturing sector is unlikely to be the driver of growth in Cyprus and therefore the island should hope for a not too-large decline in finance and an expansion of market services. Gas may come to the rescue in some years.

Cyprus: structure of the economy (% of total)

Source: Annual national accounts database of Eurostat.

Ireland: structure of the economy (% of total)

Source: Annual national accounts database of Eurostat.

Iceland: structure of the economy (% of total)

Source: Annual national accounts database of Eurostat.

Latvia: structure of the economy (% of total)

Source: Annual national accounts database of Eurostat.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article More by this author
 

Podcast

Podcast

A decade of economic policy

Guntram Wolff looks back at the past decade of Bruegel contribution to economic policy in Europe.

By: The Sound of Economics Topic: Banking and capital markets, Digital economy and innovation, European governance, Global economy and trade, Green economy, Inclusive growth, Macroeconomic policy Date: June 30, 2022
Read about event More on this topic
 

Upcoming Event

Jul
5
12:30

Green public investment after COVID-19

How can the public sector meet the climate funding needs of the EU?

Speakers: Zsolt Darvas, Elena Flores, Louise Skouby and Laurent Zylberberg Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event
 

Upcoming Event

Jul
6
12:30

Shifting taxes in order to achieve green goals

How could shifting the tax burden from labour to pollution and resources help the EU reach its climate goals?

Speakers: Heather Grabbe, Femke Groothuis, Carola Maggiulli, Niclas Poitiers and Kinga Tchorzewska Topic: Green economy, Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic
 

Past Event

Past Event

Autonomous, digital and green Europe: a conversation with Margrethe Vestager

At this event Margrethe Vestager will touch on strategic autonomy, digital regulation and the implications of the Green Deal on competition.

Speakers: Guntram B. Wolff and Margrethe Vestager Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 29, 2022
Read article More on this topic More by this author
 

Blog Post

The implications for public debt of high inflation and monetary tightening

Expected increases in interest rates and reductions in real GDP growth rates will result in relatively small increases in public debt-to-GDP ratios, but inflation will reduce debt ratios very substantially

By: Zsolt Darvas Topic: Macroeconomic policy Date: June 29, 2022
Read article More by this author
 

Blog Post

European governance

Discretion lets Croatia in but leaves Bulgaria out of the euro area in 2023

Crucial decisions about whether a country can join the euro area depend on questionable discretionary decisions.

By: Zsolt Darvas Topic: European governance, Macroeconomic policy Date: June 22, 2022
Read article Download PDF More on this topic
 

Working Paper

Measuring macroeconomic uncertainty during the euro’s lifetime’

The basic idea is that observable forecasts of macroeconomic variables are transformations of the sets of macroeconomic information, which are so complex as to be unobservable, prevailing when the forecasts are made.

By: Monika Grzegorczyk and Francesco Papadia Topic: Macroeconomic policy Date: June 20, 2022
Read article More by this author
 

Podcast

Podcast

Growth for good?

Can economic growth be a force for good and help in the fight against climate change?

By: The Sound of Economics Topic: Green economy, Macroeconomic policy Date: June 15, 2022
Read article Download PDF
 

Working Paper

Raising EU productivity through innovation: Lessons from improved micro data

Combining recent unique firm-level data and state-of-the art research methodologies, MICROPROD research provides a better overview of which firms are most likely to adopt digital technologies and to innovate, and to turn these investments into productivity growth.

By: Reinhilde Veugelers and Frederic Warzynski Topic: Digital economy and innovation, Macroeconomic policy Date: June 13, 2022
Read about event
 

Upcoming Event

Sep
6-7
09:00

Bruegel Annual Meetings 2022

The Annual Meetings are Bruegel's flagship event which gathers high-level speakers to discuss the economic topics that affect Europe and the world.

Topic: Banking and capital markets, Digital economy and innovation, European governance, Global economy and trade, Green economy, Inclusive growth, Macroeconomic policy Location: Palais des Academies, Rue Ducale 1
Read article Download PDF More on this topic More by this author
 

Working Paper

Technology, trade, work councils and income distribution: new insights from MICROPROD

Using various micro datasets, Work Package 5 of the MICROPROD project made significant contributions to our understanding of the distributive implications of trade and technological change.

By: Zsolt Darvas Topic: Macroeconomic policy Date: May 31, 2022
Read about event More on this topic
 

Past Event

Past Event

MICROPROD Final Event

Improving understanding of productivity, its drivers and the way we measure it.

Speakers: Carlo Altomonte, Eric Bartelsman, Marta Bisztray, Peter Bøegh Nielsen, Italo Colantone, Maria Demertzis, Wolfhard Kaus, Javier Miranda, Steffen Müller, Hannu Piekkola, Verena Plümpe, Niclas Poitiers, Andrea Roventini, Gianluca Santoni, Valerie Smeets, Nicola Viegi and Markus Zimmermann Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 31, 2022
Load more posts