Wednesday, 10 November 2010

Sleepwalking into a major crisis: 1931, 2010.

In 1931 the colonial government of Cyprus was facing an unprecedented problem: possible bankruptcy. Having used up its meagre reserves during the economic recession, the government found a market that was unwilling to lend to it and a domestic population that was already squeezed hard by the combined calamity of declining global prices and exceptional drought. The colonial government attempted to raise taxation, but it was denied by the Cypriot legislative council, which was demanding that the government first reduced its wage expenditure. The governor did not want to be in conflict with the organisation he relied for in order to govern, and thus he decided that inactivity was the best policy. The result was a further slide in recession, social upheaval and rioting.
The similarities with the current situation are striking. In 2009 the current government was faced with a similar choice – the possibility that the unsustainable budget deficit would lead to future bankruptcy. Having attempted to raise taxation, they found their way blocked by the parliament, which was perhaps indirectly requesting that government expenditures (of which wages is the largest share) where first contained. The government’s response was to wait and borrow, unwilling to be in conflict with the powerful lobby of government officials that PASIDY represents. The result is that we are sleepwalking through the recession: shops are being shut, unemployment has reached record levels and not performing debts are mounting. The issue of this "wait and see" policy is clear:the government is not active in any major way to help the economy find its way to prosperity.
Like in 1931, the present government, is faced with the choice of either increasing investment to help the economy (which it can only do without borrowing only if it reduces government wages), or reducing investment and keeping those who help it rule satisfied. I worry that it has chosen the latter. The result is an economy that has no government helping hand while our public debt is still creeping towards the danger zone. Let us hope the parallels with 1931 end soon, before it is too late.

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