Monday, 21 April 2008

Defending the Central Bank of Cyprus – Don’t Shoot the Messenger!

There has been a rising storm against the Governor of the Central Bank of Cyprus. Dr. Orphanides was by far the most qualified choice as a central banker, being a technocratic banker par excellence. As I warned in a previous article inflation was bound to be an issue for the new government and their reaction up to know has been to shoot the bearer of bad news.

Not all economists agree: people that i admire who know the economics of Cyprus better than myself think the Governor's comments were missplaced. But I dissagree. I believe that this government has been very successful its first few months at office. But AKEL is now attacking Dr. Orphanines for warning about the automatic inflationary mechanism that is the cost of living wage adjustment is exactly the sort of thing that makes me worry about inflation in Cyprus.

The adjustment created a mechanism to inject the increase prices of oil and foodstuff to the wages and thus to the economy as a whole, leading to enough additional inflation to make us all worse off. One needs to be a very brave politician to admit this. Looking at Italy today it is clear that bad ideas, undertaken to help the “common man”, hurt the economy as a whole, and make the less privileged even more dependent on government payouts.

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