Posts by Sapienta Economics

16 Jul 2017 An idea of the deal that never was

One of the greatest tragedies of the breakdown of the talks to solve the Cyprus problem in Crans-Montana last week was that we had only just found out what each party really cared about. This only really came out at the ‘last supper’, as people are now calling it, on July 6. We already knew that Greek Cypriots really cared about an end to troops and guarantees, but it was only at the dinner that it became clear (to me, at least) that the real trade-off for that was a generous rotating presidency for Turkish Cypriots. We also knew that Turkey wanted something out of all of this, too, namely equal treatment for Turkish nationals. Just in case there is any life yet in the federal model, below I have outlined a few ideas on how to incentivise everyone to make the deal. The main premise here is that Cyprus should become a ‘normal’ country, in the words of UN Secretary General Antonio Guterres. In my view, this means Cyprus will have to see an end at some fixed, knowable point, to troops and guarantees. My primary reason, apart from a personal interest in wanting to live in a normal country myself, is that I do not think any Greek Cypriot leader can win a referendum without a firm date for the troops to leave. It will be hard enough to win a referendum even with this date. A small number of Turkish troops forever will just not cut it. Turkish Cypriots will only consent to zero troops if they feel safe. That means very robust mechanisms to anticipate, outlaw and tackle hate speech, hate crimes and discrimination. This is not a trivial concern. I hear that the Republic of Cyprus police have been inundated with complaints about social media harassment of peace activists. Turkish Cypriots also frequently complain that not enough is done to tackle attacks on cars and so on. It also means robust mechanisms to ensure that the constitution and power-sharing arrangements are being implemented as agreed and that the troops are leaving according to a set timetable. This will probably need an international body and possibly an international force, for a transition period. I will not go into the details of that here, but there are plenty of ideas out there for how it might work in a way that satisfies everyone. I have put the deal as a choice between four options. Each option has different incentives to be generous. Option 1 includes the greatest “takes” for each party – zero troops after a short period for Greek Cypriots, highly visible power-sharing for Turkish Cypriots and freedom of movement for Turkey. But it also involves the greatest “gives”. The idea is that each party has a powerful incentive to go for the most generous option. Option 1 Troops 0 after 5 years: Turkey offers troops and guarantees expiring automatically after five years if an international body declares that domestic implementation (power-sharing, conflict-prevention measures, anti-discrimination and so on) is proceeding smoothly. The international body gives reassurances to the Turkey and the Turkish Cypriots that Greek Cypriots will not try to play with the constitution, as they complain they did in 1963. Joint-ticket presidency: Turkish Cypriots offer presidential elections on ‘joint tickets’ (Greek Cypriot and Turkish Cypriot candidates running together). This reduces accusations of ethnic division so raises the chances of Greek Cypriots accepting power-sharing and a rotating presidency. Presidency rotates 1:1: In return for such a short period for the withdrawal of troops and a joint-ticket presidency, Greek Cypriots offer rotation on an equal, 1:1 basis. This gives...

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09 Jul 2017 Cyprus, Turkey and the four freedoms

One of the issues on the table at the Conference on Cyprus in Crans Montana these past two weeks has been the rights of Turkish citizens in Cyprus. This has typically been described as Turkey wanting the ‘four freedoms’ (freedom of movement of goods, services, capital and labour). Turkey’s specific request is that Turkish nationals should enjoy the same rights in Cyprus as Greek nationals. Are non-EU nationals an EU or national competence? Greek Cypriots have argued that giving equal rights to Turkish nationals will somehow make a united Cyprus a second-class member state, since no other country gives freedom of movement to Turkey. Let us take a look at what the EU law on third-country nationals says. Article 79(1) on the Treaty of the Functioning of the European Union says “The Union shall develop a common immigration policy aimed at ensuring, at all stages, the efficient management of migration flows, fair treatment of third-country nationals residing legally in Member States, and the prevention of, and enhanced measures to combat, illegal immigration and trafficking in human beings.” However, this paragraph is more about practical ways of handling immigration than decisions on who can and cannot come to the country. That is dealt with in Article 79(5): “This Article [meaning Article 79] shall not affect the right of Member States to determine volumes of admission of third-country nationals coming from third countries to their territory in order to seek work, whether employed or self-employed.” In other words, the decision on whether non-EU nationals of certain countries can come and live or work in an EU member state is not an EU competence; it is entirely up to that EU member state to decide. This is why, for example, the UK allows Commonwealth citizens aged between 17 and 30 to come for a two-year ‘working holiday’ – something that does not exist in other EU member states. A united Cyprus will, therefore, be able to make its own decisions about how many Turkish nationals come live and work in Cyprus. Accrued rights Another issue that people have expressed concern about is whether Turkish nationals living in Cyprus would be able to acquire rights over time, including being allowed to claim citizenship of a united Cyprus. However, citizenship is also a national competence. The second declaration in the Treaty on the European Union makes it clear that questions of citizenship are entirely in member state hands: “the question whether an individual possesses the nationality of a Member State shall be settled solely by reference to the national law of the Member State concerned”. Now, it is possible (and I am guessing here) that the EU might have some competence if a united Cyprus makes it harder for Turkish nationals to gain citizenship than, say, Russian citizens. But since the EU was prepared to allow limits even on Turkish residents in 2004, one can assume it will allow deviations here, too. Another potential concern for other EU countries is whether Turkish citizens will end up acquiring rights to move en masse to other EU countries. Again, EU law suggests this would not be the case. The Long Term Residents Directive allows non-EU nationals to acquire some rights after five years under certain conditions. If they have a “adequate resources”, health insurance and do not “constitute a threat to public policy or public security”, then they can work, have the right to access education and vocational training, core social protection and assistance, and goods and services. The EU’s website on these issues says that they “also benefit from the possibility, under certain conditions, to move from one EU State to another”. I have not...

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02 Jul 2017 Is Cyprus becoming more unequal?

Every month I take a deep dive into the Cyprus economy, looking at all kinds of indicators to explain to subscribers what is going on and what might come next. Going as deep as possible into the statistics can alert you either to forthcoming problems, or better times ahead. For example, after a lot of rummaging around in bank financial statements in April 2011 (two years before the peak of the crisis), I wrote about the risks to the now-defunct Laiki of a 40% haircut on Greek government bonds (in the end the haircut was closer to 75% and led to the death of the bank). Later, in August 2013, deep data-crunching made it obvious that the economy was not going to contract at double-digit rates, as many organisations, including my own, had predicted. Some of those others carried on predicting a decline of over 10% for several months. One of my favourite geeky pursuits is to find something odd, which does not make sense at first sight, and then to keep on digging around until I finally work out what is going on. My latest data puzzle is the performance of household consumption and retail sales. We know that the economy (real GDP) expanded year on year by a buoyant 3.3% in the first quarter of 2017. We know that tourism is heading for yet another record year and that construction is growing rapidly after a multi-year recession. Employment is expanding across all the major sectors; unemployment is falling. Under normal circumstances, or as economists like to say, other things being equal, you would expect all of this accelerated expansion in activity to translate into faster growth of household consumption in general and retail sales in particular. Slowing down But this is not happening. Growth in retail sales volumes actually slowed in the first quarter of 2017 to just 2.4% year on year, from 5.9% in the fourth quarter of 2016. Similarly, growth in household consumption, which accounts for a massive 69% of GDP, slowed to 2.6% in the first quarter from 3.2% in the fourth quarter. Yet private car registrations boomed in the same quarter, rising year on year by more than 40%. What is going on? Before delving into possible reasons why, it is worth noting that this is only one quarter’s worth of data, so it might not turn into a trend. In addition, historical data on GDP and retail statistics, unlike tourism and motor vehicle registrations for example, get revised as more information comes in. So, it might just be a blip. But let’s assume for a moment that it is a trend. What might be behind it? If we look deeper into the retail sales statistics, we can see that the slowdown is coming from the heavily-weighted category of food. Food sales grew by just 1.1% year on year in the first quarter and actually declined in March and April. On the other hand, ‘discretionary items’, such as electrical goods and furniture (8.9%) and computer equipment and books (7.9%) bounded ahead. Is this because people are going out to restaurants more, therefore buying less food for eating at home? Apparently not. Turnover for food and beverage services activities (which is not the same as volumes) rose year on year by a fairly healthy 3.8% in the first quarter. But this was still a slowdown compared with the 8.2% recorded in the fourth quarter of 2016. The other reason for the deceleration, therefore, could be that certain sections of the population continue to feel the pinch from the crisis, having not had a pay...

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25 Jun 2017 An investment fund for a united Cyprus

If the talks among all parties that are due to take place in Crans-Montana from June 28 go the way of the optimists, and a settlement of the Cyprus problem is finally in sight, then the next focus for those involved will be how to ensure that the settlement passes a referendum in each community. This will involve a vast range of efforts to inform the public about the details of a settlement. As I have written before, a settlement also needs a big idea to get people excited about a solution, something that helps them see it can bring real jobs and real wealth. One way to focus minds is to announce the creation of a united Cyprus investment fund. For the fund to be successful, it will need to attract private capital, in particular capital from ‘institutional investors’ – the big banks, pension funds and insurance companies that make the world’s money go round. However, to ensure that the fund does not end up the way of other schemes in the past, it will also need to be very well managed. Below are a few ideas about what should go into the investment fund, who should run it and how we can ensure that it is managed in a way that benefits all stakeholders, not just the well-connected few. What goes into the fund? The fund will need seed capital. Much of the seed capital can come from EU structural funds. The European Commission President, Jean-Claude Juncker, has been reported as saying that the EU can find €3.1 billion. If true, this will be an important chunk of the initial capital. Given the desire among Greek Cypriots to see ‘Turkey pay’, there may be scope for donations from Turkey and/or other guarantor powers. In addition, if (and it is a big if) there is any appetite among other countries for direct donations, as opposed to loans, then they should be directed to the fund, too. In addition to money, the fund will need assets that can bring a return. The UK has offered land from the British Bases. I understand that it is around 11,500 hectares, of which around 2,000 hectares is state land, as opposed to private land. The state land can also go into the fund. Some of the affected property (that is, property owned by displaced Greek and Turkish Cypriots) could also go into this fund. As I have noted before, there are around 0.4 million donums (54,000 hectares) of Turkish Cypriot land in the south. We can work out how much it might be worth from the Land Registry valuations of private-sector Greek Cypriot land in the south. This 331,000 hectares was valued in 2012 at €150bn. We can therefore infer that the 54,000 hectares of Turkish Cypriot land has a potential long-term value of around €24bn. If we can find incentives to encourage Turkish Cypriots to put half of that into the fund for the purposes of long-term development, in exchange for Greek Cypriot property in the north, then you have an asset of €12bn with a potential long-term return, based on current returns, of about €600 million per year. This will go a long way towards financing property compensation. The fund could include Greek Cypriot-affected property too – large tracts of land or even parts of Varosha. Again, this could be exchanged for other land or for a return on the fund’s profits. One way of getting even more return out of these assets is with guarantees from AAA-rated institutions, as this will allow the fund to make bigger investments at...

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17 Jun 2017 Is public spending back to the bad old days?

This week the Statistical Service, Cystat, published statistics on employment in the broad public sector. The figures show that public-sector employment has hit its highest level since the Cyprus financial crisis, reaching 60,146 in the first quarter of 2017, compared with a previous peak of 61,510 in the same period of 2012. We are now fewer than 12 months away from the presidential election due in February 2018, so this begs the question of whether the government has fallen back on its bad old ways by going on a hiring spree ahead of the polls. Let’s take a look at the evidence. Rising employment Public-sector employment has been rising steadily since 2016. Although there was a small year-on-year dip in the third quarter of 2016, employment for the year as a whole was up by 663 persons or 1.1%. The increase in the first quarter of 2017 was rather higher: there was a year-on-year rise of 2,574 or 4.5%. This is the fastest increase on record, although it should be noted that the records only go back to the beginning of 2009. The rise in 2017 was entirely within the ‘central government’ sector, where employment rose compared with the year-earlier period by 2,639, or 5%, to 55,942. Employment in local authorities, on the other hand, declined, to 4,204 in the first quarter of 2017, from 4,269 in the same period of 2016. Employment in ‘publicly owned enterprises and companies’ pretty much stagnated, reaching 5,978 in the first quarter of 2017, compared with 5,983 in the same period of 2016. We can see where the increase in government employment is coming from by looking at separate data on ‘government employment’, which includes civil servants, teachers and others in education, the security services, and those paid on hourly contracts. These show that the biggest increase has been in the security services. In the first quarter of 2017, this category rose year on year by 2,717. The number of employees in education also saw an increase, but by a much lower 246. On the other hand, the number of civil servants fell in the same period by 68. Workers paid on an hourly basis also fell, by 176. The increase in security services employment is, of course, related to the policy of introducing a professional army. The government’s aim is to hire 3,000 professional soldiers. The figures show that it is well on that way to reaching that target. More casual workers However, it is worth noting that all of these additional soldiers are counted as ‘casual’ workers. Indeed, this is the case for all government workers: there have been increases in casual employees for every category, but decreases in permanent workers for every category. Casual workers presumably do not have the pay, privileges and perks that accrue to permanent employees. This is one sign, therefore, that we are not quite going back to the bad old practices of the past. The other sign comes from government spending on ‘compensation of employees’. Here we have data going back to 1995. Generally speaking, until the crisis started to brew in 2012, spending on employees rose far more quickly than it should have done. The bad old days Between 1995 and 2011, compensation of employees rose at an annual average pace of 7.7% per year. This was far higher than inflation in the same period. I calculate that, in real terms, the annual average rise in spending was 5% per year in this period. The most astonishing increase was in the election year of 2003: in that year spending on public-sector employees shot up...

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