Cyprus Minister of Finance Constantinos Petrides and the European Stability Mechanism (ESM) Chief Klaus Regling pointed out the need to maintain fiscal space which would enable states to tackle a possible future crisis, such as the 2020 Covid pandemic.
Addressing the Economist Summit, held in Nicosia, Petrides said that Cyprus is one of the few Euro area countries which in 2021 will recover the ground lost during the 2020 covid pandemic, but noted that challenges remain.
“Challenges are many, in the economy nothing should be taken for granted and we should protect the public finances, and that is one of the government’s main objectives, so that we would prepare for the next crisis which we don’t know when it will come but it will,” he said.
Petrides also estimated that inflation pressures due to the disruption in the supply chain will be transitory but will continue to be a concern, noting that the costs both to the vulnerable groups and the businesses from the EU Green Transition should be offset.
He also referred to Cyprus’ Recovery and Resilience Plan aiming to further strengthen Cyprus’ growth model which in the last years has been diversified leading to a lower recession in 2020.
On his part, Regling said the revival of economic activity in the EU was largely due to the “swift and powerful” response both on a national and an EU level, noting that the most important measure was decided last summer and will be implemented over the next five years, the €750 billion Recovery Plan “NextGenerationEU” (NGEU) which would finance he EU member-state’s national Recovery and Resilience Plans.
“If countries successfully implement the reforms that they proposed in their Recovery and Resilience Plans, they could sustainably raise their growth potential and transform their economies. Going forward, the efficient and effective implementation of these plans is the key task for all EU Member States over the next 5 years. Cyprus is no exception,” he stressed.
Regling added that the proposed measures should help achieve some key long-term macroeconomic goals, strengthening the resilience and competitiveness of the economy.
“Implementation is now essential,” he said recalling reforms such as the Justice system and the public service.
He also noted that the policy response to the pandemic came at a cost, as higher deficits and a drop in economic activity last year have led to substantial increases in public debt-to-GDP ratios.
“Nevertheless, public debt currently is sustainable in all member states of the monetary union,” he said, adding that “countries now have a higher debt carrying capacity than what was assumed in the Maastricht Treaty.”
The ESM chief noted that some elements of the Stability and Growth Pact, as they stand now, do not reflect this changed macroeconomic environment. “Going forward, a simplified EU fiscal framework could be built around a 3% deficit limit and a higher debt-to-GDP ratio,” he said.
However responding to question, Regling said he did not suggest that countries should continue on a path of expansionary fiscal policy.
Furthermore, Regling referred to the upcoming reform of the Stability and Growth Pact, the fiscal rules of the Euro area, noting.
“We know there will be a crisis one day, we don’t know when, we don’t where it comes from we did not know two and a half years ago there will be a pandemic with such a high cost so we don’t know when and what but it will happen so fiscal space is an important element when we look at an efficient management of fiscal policy,” he said, noting.
“No card blanche on spending money, we have to be prepared for the next crisis we do need extra space over time for the cost related to aging and also don’t over react on high debt ratios.
Replying to the same question, Petrides cautioned over a relaxation to the fiscal rules, noting that any reform of the Pact should maintain “the policy to be countercyclical we must save in good times.”