The reunification of Cyprus “would give a major boost to the economic and social development” of the island and “now it is indeed high time to revitalise the process leading towards reunification,” Vice-President of the European Commission and member of the Commission responsible for Economic and Monetary Affairs and the Euro, Olli Rehn, has said.
Speaking before the ECON Committee of the European Parliament, in Brussels, on the economic dialogue on financial assistance to Cyprus, Rehn said the economic support programme for Cyprus was agreed in March and the first disbursement is expected by mid-May, noting that “it will enable Cyprus to avoid a disorderly default which would have had dramatic ramifications for the Cypriot people.”
Referring to the reasons that Cyprus is now facing financial difficulties, Rehn said that “at their origin was an oversized banking sector that thrived on attracting foreign deposits with very favourable conditions,” adding that “the banking problems were aggravated by poor practices of risk management.”
“The Commission warned Cyprus about its accumulating problems early on. Warnings and policy guidance to tackle the banking problems and consequent fiscal and macroeconomic imbalances were included in the reports and Country-Specific Recommendations under the first European Semester in June 2011. Then, in November 2011, we communicated to the Cypriot authorities that a financial assistance programme would be unavoidable, unless the persistent economic problems were immediately addressed. Eventually, Cyprus asked for financial assistance, but only in June 2012,” he pointed out.
He added that “it is unfortunate that it took Cyprus more than half a year to accept the gravity of the situation and the unsustainability of its business model, and it is similarly unfortunate that it took Cyprus another nine months to reach an agreement with the Eurogroup.”
Rehn referred to the key objectives of the financial assistance programme, which “will support Cyprus in correcting the excessive economic imbalances from which it is suffering.”
“Its key objectives are to restore the viability of the banking sector through deep restructuring, to ensure the health of public finances, and to create the conditions for recovery of growth and job creation,” he said.
He added that “the programme aims at ensuring a smaller but resilient and transparent banking sector” and that “reforming the legal framework for anti-money laundering and ensuring its effective implementation is a key element in this respect, and a necessary condition for ESM funding.”
“In terms of fiscal policy, the programme allows Cyprus to eliminate the excessive deficit over a period of four years. The programme also outlines a comprehensive agenda of structural reforms in order to create the conditions for the renewal of the Cypriot economy, building on its strengths, such as its well-educated and skilled labour force and tradition of entrepreneurship,” he said.
Rehn assured that “the Commission stands by the Cypriot people to help them through these tough times and to rebuild their economy.”
“We will provide technical assistance to Cyprus through a Support Group. I trust that we can count on your support in mobilising the available resources for Cyprus, as quickly and as effectively as possible,” he added.
Rehn suggested that there are four lessons to be learnt. “First, there must be absolute clarity about secured deposits. In this respect, the Eurogroup and Cyprus took rapid corrective action and underlined that secured deposits indeed are secured in Europe. Second, we need a banking union to prevent the development of unsustainable banking sectors like in Cyprus,” he said.
“Third, when it becomes inevitable that a country is in need of financial assistance, it is essential that action is taken as soon as this is recognised. Delays are very costly to the economy and society. Fourth, we have to recognise the structural problems of our decision-making in the area of economic and financial affairs. This calls for the completion of the Economic and Monetary Union, which should bring the current inter-governmental arrangements into the Community framework and strengthen the external representation of the euro area,” he added.
In conclusion, he said he has “worked hard for five years as Commissioner for enlargement to facilitate the reunification of Cyprus.”
“I regret that there has been no decisive progress. Today, it is worth recalling that the reunification of the island would give a major boost to the economic and social development of Cyprus. Now it is indeed high time to revitalise the process leading towards reunification,” he said.