Blog Post

A year since Cyprus

It is still too early to conclude that the Cyprus programme will be successful, particularly in terms of enabling the country to regain market access in a timely manner for a clean exit. But it can be said that so far so good: the programme is broadly on track with respect to conditionality compliance and the macroeconomic outcomes have been better than expected.

By: Date: March 19, 2014 Topic: Macroeconomic policy

A year ago EU and Cypriot officials were in tense negotiations trying to find the right balance between bailing-in and bailing-out Cyprus; ultimately, only uninsured depositors were bailed-in meaning that the major blunder of breaching the EU deposit insurance scheme could be avoided (thanks to the rejection of the plan by the Cypriot House of Representatives), that the Cypriot government was bailed-out with the programme’s approval and contagion was prevented.  But despite our (and other economists) strong criticisms, capital controls were imposed for the first time in a euro-area member state, creating a de-facto second-league euro.

So far the programme has turned out slightly better than expected in terms of GDP growth; the latest European Commission economic forecast estimates that the Cypriot economy shrank by 6 percent during 2013 instead of the originally expected 8.7 percent; the economy will start growing again in 2015 as originally foreseen. However, as was the case in all other euro-area macroeconomic adjustment programmes, the unemployment rate overshot the forecast but only by one percentage point, increasing to 16 percent during 2013.

Cyprus real GDP (2012=100)

Sources: The Economic Adjustment Programme for Cyprus, Occasional Papers 149, May 2013 and European Commission Economic Forecast Winter 2014

Unemployment rate projections and realisations in euro-area financial assistance programmes

Sources: IMF WEO October 2013, programme documents and European Commission Economic Forecast Winter 2014

The financial system reforms, which are probably the most important part of the programme because the banking sector was the root of the Cypriot crisis, are broadly on track although with some delays. Fitch Ratings have upgraded the ratings of Bank of Cyprus and Hellenic Bank, the two largest credit institutions on the island, because they were successfully recapitalised. In the case of Bank of Cyprus, this was done even without relying on state aid, while Hellenic Bank is still being restructured. The restructuring of the cooperative banking sector is also ongoing. This entails the merging of 93 cooperative credit institutions into 18 institutions under the management of the Central Cooperative Bank (under state control). Nevertheless, some substantial risks remain as non-performing loans continue to soar.

The progress made on the financial system has allowed the planned relaxation of the restrictive measures on capital movement to take place, and the capital controls are now expected to be completely abolished by the end of year according to Cyprus’ Central Bank chief Panicos Demetriades, confirmed by Cypriot President Nicos Anastasiades. As we argued in our latest assessments of the Troika programmes: in a monetary union, the lifting of capital controls is in principle easier to achieve, because the common central bank can stand ready to replace out-flowing liquidity. However, solvency problems in the banking system need to be addressed first so that the European Central Bank can step in.

It is still too early to conclude that the Cyprus programme will be successful, particularly in terms of enabling the country to regain market access in a timely manner for a clean exit. But it can be said that so far so good: the programme is broadly on track with respect to conditionality compliance and the macroeconomic outcomes have been better than expected, with the exception of the labour market. Thus, the likelihood of Cyprus turning out to be a second Ireland is greater than that of it turning into a second Greece or even Portugal.

Republishing and referencing


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
 

Blog Post

European governance

Opaque and ill-defined: the problems with Europe’s IPCEI subsidy framework

Lack of strict governance and transparency creates serious risk that fair competition within the single market will be undermined. Fundamental overhaul of the framework is needed.

By: Niclas Poitiers and Pauline Weil Topic: European governance, Macroeconomic policy Date: January 26, 2022
Read article More by this author
 

Podcast

Podcast

Turkey’s economic struggles

Will inflation continue to surge?

By: The Sound of Economics Topic: Global economy and trade, Macroeconomic policy Date: January 26, 2022
Read article More by this author
 

Opinion

European governance

The euro comes of age

A well-functioning euro reflects a degree of unity that allows the EU to credibly claim a position at the global table and therefore help shape the policies that will deal with global problems. That is a decisive success.

By: Maria Demertzis Topic: European governance, Macroeconomic policy Date: January 13, 2022
Read article More on this topic More by this author
 

Opinion

A role for the Recovery and Resilience Facility in a new fiscal framework

Discussions on reforming European Union fiscal rules must consider a more permanent but targeted role for the Recovery and Resilience fund to meet climate ambitions.

By: Maria Demertzis Topic: Macroeconomic policy Date: January 10, 2022
Read article More by this author
 

Podcast

Podcast

The European economy in 2022

What are the economic priorities for the new year?

By: The Sound of Economics Topic: European governance, Macroeconomic policy Date: January 5, 2022
Read article More by this author
 

Opinion

European governance

The Euro at 20

The euro’s advocates hoped that the single currency would deliver economic and financial integration, policy convergence, political amalgamation, and global influence. While these predictions were often wide of the mark, the euro has arguably proven to be a wise investment.

By: Jean Pisani-Ferry Topic: European governance, Macroeconomic policy Date: January 3, 2022
Read article
 

Blog Post

European governanceInclusive growth

12 Charts for 21

A selection of charts from Bruegel’s weekly newsletter, analysis of the year and what it meant for the economy in Europe and the world.

By: Hèctor Badenes, Henry Naylor, Giuseppe Porcaro and Yuyun Zhan Topic: Banking and capital markets, Digital economy and innovation, European governance, Global economy and trade, Green economy, Inclusive growth, Macroeconomic policy Date: December 21, 2021
Read article
 

Blog Post

European governance

Policy coordination failures in the euro area: not just an outcome, but by design

Discussions on the fiscal framework should aim to correct its procyclical nature with a view to promoting more cooperative outcomes.

By: Maria Demertzis and Nicola Viegi Topic: European governance, Macroeconomic policy Date: December 20, 2021
Read article
 

External Publication

European governance

EU borrowing—time to think of the generation after next

Financing post-pandemic recovery via EU borrowing has proved remarkably straightforward. So why keep it temporary?

By: Grégory Claeys, Rebecca Christie and Pauline Weil Topic: European governance, Macroeconomic policy Date: December 9, 2021
Read article More on this topic More by this author
 

Opinion

Inflation ideology: camp permanent or camp temporary?

Policy focus should be on tackling uncertainties by being able to tackle as many scenarios as possible.

By: Maria Demertzis Topic: Macroeconomic policy Date: December 9, 2021
Read about event More on this topic
 

Past Event

Past Event

Fiscal policy and rules after the pandemic

What are the possibilities for shaping the new fiscal policy?

Speakers: Zsolt Darvas, Maria Demertzis, Michel Heijdra and Katja Lautar Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: November 24, 2021
Read article
 

Blog Post

European governance

Including home-ownership costs in the inflation indicator is not just a technical issue

The European Central Bank is right to propose inclusion of owner-occupied housing services in the inflation indicator. But the ECB’s preferred method would involve an asset price in the consumer inflation indicator.

By: Zsolt Darvas and Catarina Martins Topic: European governance, Macroeconomic policy Date: November 18, 2021
Load more posts