[Cyprus Times] Cyprus and its people are inspiring, says Lagarde

The example of Cyprus and the spirit of its people are inspiring, as they are flexible, resilient and can turn crises into opportunities, European Central Bank President Christine Lagarde said on Wednesday. Lagarde, who was speaking at a conference organised by the Central Bank of Cyprus in Nicosia, referred to the potential impact on Cyprus of the crisis in Ukraine, noting that the country would be affected by inflationary pressures from increased energy costs and that tourism would be hit, while services would be affected to some extent. At the same time, she expressed confidence that "with the right policy response, we can limit the impact of the war and manage the high level of uncertainty we face."[/P]

In her speech and referring to Constantine Cavafy's "Ithaca", the ECB chief said it captures well the story of Cyprus, which is full of adventures and obstacles, and the story of its people becoming stronger by overcoming them.

She referred to the crises in modern Cypriot history from the Turkish invasion of 1974 to the financial crisis of 2013, noting that Cyprus managed to have an incredible 6% economic growth from 2015 to the beginning of the pandemic.

Cyprus' results, he said, provided an answer to those who criticized its economic model, as Cyprus managed to recover very well even after the pandemic.

In relation to the war in Ukraine, he said it was agreat shock for Europe because of its proximity and dependence on Russia and Ukraine.

"We need to study the economic situation we are in, address the impact the war will have on the economy and figure out what policies should be adopted in response," he said.

He said the economy seemed to be recovering well from the pandemic, much faster than in previous crises and recalled that it took seven years for the economy to recover from the previous crisis, and by the end of 2021 within two years, GDP levels had surpassed pre-pandemic levels, while unemployment was at record lows similar to those of the 1970s.

Cyprus' GDP grew by 5.6% last year, returning to 2019 levels, and unemployment returned to its pre-pandemic level of 6%, he said.

The difference between the two crises, Lagarde said, was "the common, coordinated policies decided at the European and national level, an excellent policy response, bringing fiscal and monetary policy together, working together to protect incomes and demand."

He noted that it was not so easy to restart supply after the lockdowns, which created inflationary pressures, adding that since June two-thirds of inflation in the eurozone, which has reached 5.9 percent, is due to energy and food. She added that these problems were expected to subside with the return to normality, but the war had caused considerable uncertainty for the economy.

According to the ECB President, the economic impact of the war has caused further shocks to the supply system, which is simultaneously pushing inflation up and growth down. As he explained, three factors are expected to push inflation higher. The first is energy prices, gas prices (up 52% since the start of the war) and oil prices (up 64% since the start of the war). The second is pressures on food inflation since Russia and Ukraine account for around 30% of world wheat exports. Finally, "bottlenecks" in global industry are expected in some sectors.

For Europe, he said, there are many risks as it is a net importer of energy. Rising energy prices mean a fall in consumers' purchasing power. This has already reduced income by 1.2% of GDP in the fourth quarter of 2021, equivalent to €150 billion a year, he added.

The second impact has to do, he said, through confidence. Households, he said, are becoming more pessimistic and may reduce their spending and expect inflation to rise further. Business investment is also expected to be affected. Although business activity remained at good levels in March, their expectations fell sharply after supply delays began to be observed again, she added.

With regard to Cyprus, Lagarde said the country would be affected by inflationary pressure from higher energy costs and tourism would be hit, with Russian and Ukrainian tourists accounting for 27% and 5% respectively of 2021 tourists. In addition, he added, professional services, such as the legal and financial sectors, will be affected at some level. In response to a question on the services sector, he predicted that affected businesses will find new sectors to develop.

However, he noted, Cyprus' fundamentals are very different from those in the previous crisis, as the banking sector is in a different position, adding that NPLs have fallen from 50% of all loans in 2014 to single digits this year.

"With the right policy response, we can limit the impact of the war and manage the high level of uncertainty we face," he said. He said national fiscal policies, such as tax caps and subsidies, can address the short-term effects of high energy prices. At the European level, he said, rules have been relaxed to allow governments to take the necessary measures.

Europe, he noted, "is entering a difficult phase", adding that "the longer the war, the greater the cost."

He called the Russian invasion of Ukraine a turning point for Europe, adding that for those who wanted to see Europe weaker and divided, "Europe appeared unanimous."

"The example of Cyprus and the spirit of its people are inspiring, as they are flexible, resilient and can turn crises into opportunities," he concluded.

Asked about women's representation in Cyprus, he replied that "it is not enough." All states, she said, have an obligation to ensure that there is an option, by providing childcare, public infrastructure, to help both parents to remain in the labour market if they wish. He noted that this is a good investment since it will result in more productivity.

For his part, Central Bank Governor Constantinos Herodotou said that the visit of Mrs. Lagarde's visit to Cyprus is recognition of the active role of Cyprus and the Central Bank of Cyprus in particular, in shaping the common European monetary strategy.

He noted that at the beginning of the year, economic confidence was improving and GDP was recovering rapidly.

The war in Ukraine has changed everything, he said, as it has shaped an economic environment of greater risks and uncertainties.

"The situation needs a policy that goes to the core of European values," he said, expressing confidence that "the euro area will be able to face the challenges and emerge stronger from this crisis."

Herodotou referred to the ECB's policies in recent years which he said had led the eurozone economies to emerge from the pandemic with the least possible negative consequences.

With the Russian invasion of Ukraine, there are modest expectations for continued strong GDP growth in the eurozone and Cyprus, at least in the short term, he said.

According to the central bank governor, there is growing uncertainty about the economic impact of the conflict, the degree of severity of sanctions and the degree of potential economic retaliation from Russia.

In Cyprus, the economic impact is expected to be channelled through higher oil prices, trade in goods and services such as minerals, oil, grains, tourism, transport and IT services, as well as a negative impact on professional services.

He said internal scenarios managed by the central bank point towards a downward impact on GDP growth and an upward impact on inflation for 2022. In a scenario that sees the situation normalising by the end of 2022, GDP growth is expected at 2.7% this year compared with the initial forecast of 3.6% before the start of the war, he added.

"We still estimate that there will be a very strong recovery in the medium term of around 3.7%," he said."

Herodotou said that in this ever-changing global environment, we should be neither optimistic nor pessimistic. Instead, he said, "we must act. And we will act in a responsible way with realism and honesty."

Europe's citizens need to be aware of the challenges and difficulties, he said, adding that an informed citizen acts more responsibly. "And that is the best response to any challenge," he concluded.

Source: CNA

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