Cyprus: An economic Enigma for the EU

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The EU Delegation to the United States has this to say in describing their union of nations: “The European Union is a unique political and economic partnership among 27 democracies united in their commitment to peace, democracy and the rule of law and respect for human rights.”

Recently the spotlight has been on the Island of Cyprus with a population of about 1 million people on a land mass smaller than Connecticut but larger than Delaware with a GDP of $24 Billion. The capital, Nicosia, is home to about 1/4th of the nation’s people. Although many of the member nations in the EU have been experiencing financial difficulties, the most prominent problems have been in Greece and Cyprus.

 The mainline news media have been writing and talking about the current bank closures and the proposals to pluck varying percentages of savings from individual bank deposits. The leaders of Cyprus want the EU (the largest single market in the world comprised of 500 million residents) to step in and help bring stability to their financial structure.

Strangely, we haven’t heard the genesis of the financial problems of Cyprus – a country now as helpless as an upside-down turtle. Harris Samaras, an economist and native of Nicosia has worked with international investment and banking firms and is now Chairman and CEO of Pytheas, an international investment management firm. Here are some snippets from his article published on December 22, 2011: “Cyprus has the largest public sector payroll in the Eurozone, as a proportion of output (15.4% of GDP in 2010).” He adds that public sector payroll combined with social benefits absorb 45% of total government spending and because these ‘public servants’ receive automatic pay increases, their earnings are 30% above private sector jobs.

Samaras’ article concludes with these remarks, “Note that the day Cyprus is forced to join the European Financial Stabilisation Mechanism (EFSM), that very same day Cyprus will stop being an international business and financial center. Cyprus will not be deciding for its own future alone. Will the labor unions (Acronym for labor unions = PASYDY) give the example or not?”

Note: Since Samaras’ article was written, The European Union established the European Stability Mechanism on February 2, 2012, a permanent intergovernmental organization under public international law that was ratified by the participating EU member states and inaugurated on October 8, 2012. The authority will have subscriber capital of €700 ($897) billion contributed by EU member states with a €500 ($641) billion lending capacity.

Warnings predicted by Samaras were ignored. This seems to be typical government response throughout the world; to disregard the thoughtful comments and suggestions of seasoned business people and scholars to the detriment of those poor souls that put them in office; the deceived and derided taxpayers.

Representing an almost insignificant .2% of the EU’s GDP, the bailout for this small population and economy will be a test for the solidarity of the EU. Banks in the EU are allowed by law to establish branches in other member countries without an obligation to convert them into subsidiaries. However, the UK convinced Cyprus’ largest bank to convert its UK branch to a subsidiary, making its deposits covered by the UK deposit guarantee program. The effort to avoid spreading perceived risks of bank insolvencies to other countries may become a hot-button issue among the member states.

The future of the European Union will be molded in the uncertain bailiwick of compromise and the vigorous pursuit of temporary austerity to achieve long-term fiscal responsibility and stability. Can this union, developed from disparate cultures, languages, currencies and forms of government aspire to inspire before it expires?

– Dick Baynton