Cyprus has been squeezed in the corridors of power

Sir, Your editorial “Europe gets real – not before time” (March 26), which suggests that Cyprus got the best deal it could have expected, sits oddly with its acknowledgment that, like the Greek economy before it, Cyprus’s economy could contract by 25 percent over the next few years. Were anything like that to occur, Cyprus would have the greatest of difficulties in complying with the strictures of its IMF-EU bailout package, which is premised on a gross domestic product contraction of “only” about 3.5 percent in 2013.

With such bleak prospects ahead, one might ask whether Cyprus would not have been better advised to exit the euro as a means to limit the decline in its economy. For by exiting the euro, Cyprus would have been able to use a cheaper currency to promote its tourist sector as an offset to its fiscal adjustment as well as to effect the necessary adjustment of its economy away from an excessive reliance on its financial sector.

What might have been a good deal to get Angela Merkel through her September 2013 election would not appear to have been a good deal for Cyprus. It is also not clear that it will have served to keep a collapsing Cyprus in the euro over the longer haul. This would particularly appear to be the case since 67 percent of the Cypriot electorate already has doubts about the advantages of staying in the euro.

Desmond Lachman, American Enterprise Institute, Washington, DC, US

 

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Desmond
Lachman
  • Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the International Monetary Fund's (IMF) Policy Development and Review Department and was active in staff formulation of IMF policies. Mr. Lachman has written extensively on the global economic crisis, the U.S. housing market bust, the U.S. dollar, and the strains in the euro area. At AEI, Mr. Lachman is focused on the global macroeconomy, global currency issues, and the multilateral lending agencies.
  • Phone: 202-862-5844
    Email: dlachman@aei.org
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