Our take: Changing EU rules exposes states to populist demands

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There is no economy in the world where populism has proven to be an effective tool in the fight against inflation, although, listening to some Cypriot parties, one might think that it is the only way to control the price increase. The reality is very different. Populist measures to protect consumers invariably increase inflation rather than curb it.

Unfortunately, in Cyprus we are victims of Akel’s economic irrationality, whose bizarre economic ideas are adopted by most parties. A brief statement released by the party on Thursday summed up this irrationality perfectly. The latest inflation figures in Cyprus and the EU, he said, “most clearly confirm the sloppy and superficial manner in which the Anastasiades-Disy government has faced the high price up to now. now”.

He did not inform us of what would have been a prudent and efficient way to deal with the high prices. Should the government have appointed a “price czar” to impose ceiling prices on all essential products and force suppliers to sell them at a loss? Perhaps he should have imposed fines on companies that “unjustifiably” raised their prices. The truth is that the government cannot do anything because the monetary policy of the euro area is dictated by the ECB which has instead helped fuel the price hike by continuing to buy public debt and maintaining interest rates. negative.

In a demonstration of his demagogic economics, Akel also called for the full reinstatement of Automatic Wage Indexation (CoLA) in the public and private sectors as a “mechanism for restoring the purchasing power of wages”. This mechanism is purely inflationary because it raises labor costs without increasing productivity, which increases upward pressure on prices. In the public sector, this only increases the public deficit. If anything, CoLA is reducing the purchasing power of wages by fueling inflation, but Akel’s populist dogma is blind to this harsh reality.

Although CoLA is primarily a union and employer affair, the government has yielded to another populist demand from parties, led by Akel. He agreed to reduce the VAT on electricity bills from 19% to 9% for households, in addition to the 10% discount on all bills for four months. The issue was raised in the House last Monday and although Disy rightly opposed it, Finance Minister Constantinos Petrides announced on Thursday that the government has notified the European Commission of its intention to do so for three months. The opposition parties were of course not satisfied because they wanted the VAT cut to be longer and to be extended to businesses.

What is disappointing is that the Commission is encouraging this kind of irresponsible fiscal policy. Defending the measure that would undermine budget planning, Petrides said: “This is in line with the toolbox and the Commission’s recommendations to tackle price hikes, which refer to the adoption of temporary and targeted measures that will allow does not affect the market. In the past, the Cypriot government could rely on Commission rules against fiscal recklessness to keep populists at bay, but it can no longer do so, due to the latest advice from Brussels.

This contempt for fiscal discipline was unheard of until a few years ago, but the pandemic has prompted the European Commission to follow the ECB’s example by rewriting the rules for prudent economic policy. The ECB has kept interest rates negative and persists in quantitative easing by buying government debt, even though eurozone inflation, according to Eurostat, was 4.1% in October; in Cyprus it was 4.4 percent. These monetary policies have caused bubbles in most member states which will eventually burst causing major social problems.

Today, large EU states such as France, Spain and Italy appear determined to put aside for good the Stability and Growth Pact, which was designed to prevent member states from spend too much. All of the Pact’s fiscal rules were completely ignored during the pandemic, with the blessing of the Commission, and there do not appear to be any plans to resume them anytime soon. The reduction in VAT is the latest example of the fiscal indiscipline encouraged by Brussels. Not only does the Union circumvent its own rules, but it also puts Member States under enormous pressure and exposes them to populist demands.

“In the past, we considered that the EU, with its strict rules, protected us from fiscal populism, but this is no longer the case,” said an official from the Cyprus finance ministry. Macroeconomic stability seems to have ceased to be an EU objective just as low inflation is no longer the ECB’s priority. The pandemic has radically changed economic thinking in the EU. The fact that the reckless populist economy of the Cypriot parties is given the green light is proof of this.


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