Economists and authorities in Cyprus are increasingly concerned that the surge in inflation that hit the island will turn into a tidal wave that will last for several years as the process of “de-globalization” begins.
Government officials changed their stance a few weeks ago when the effects of inflation began to be felt, echoing the EU line, insisting it was temporary.
During this week’s economic summit, Finance Minister Konstantinos Petrides painted a bleak picture, saying high inflation would continue.
Petrides said governments are likely to spend more to protect the population from rising energy prices and food inflation that states will need to adjust their entire economic policies.
In a commentary to the Financial Mirror, Ioannis Tirkides, director of financial research at the Bank of Cyprus, said that high inflation could persist for several years as the process of de-globalization is in full swing.
He explained that inflationary trends, which were already on the rise during COVID due to disruptions in the supply chain, worsened after the start of the war in Ukraine.
“However, things could get much worse if the drift between west and east deepens,” Tirkides added.
While we think COVID is over, Shanghai and its port were shut down just a few weeks ago due to a surge in cases in the city, Tirkides added a war in Ukraine, and sanctions added another supply shock.
“The war in Ukraine is a watershed event with consequences that will be multifaceted and long-term.“These consequences will be both economic and geopolitical.
“The terms ‘normal’ or ‘new normal’ coined during the pandemic are no longer relevant, at least in the sense they were before this war.”
He argued that if the conflict in Ukraine expands with countries like China backing Russia, then we could have another Cold War.
“This will accelerate the process of deglobalization, which has already been partially launched.
“If the supply shock is temporary and inflationary pressures disappear for the foreseeable future, there is no need for monetary authorities to react.
“Central banks should respond to spillovers if higher costs lead to higher prices and if wages rise more than productivity gains.”
Tirkides believes the ECB faces a political dilemma. Raising interest rates to curb inflation would increase uncertainty and hurt growth.
“This time, the EU will have to rely more on fiscal policy instruments and pursue monetary policy very carefully.
“In the long term, Europe must rethink not only defense and energy security, but also its fiscal architecture, the sustainability of its member states and what is called strategic autonomy.
“It will take a lot of money and a lot of ingenuity.”
Increasing the Benefits
The government is doing its best to respond to the impact of high inflation, as are most EU member states, said DISY’s ruling MP and economist Marios Mavrides.
Noting that high inflation is projected to continue for at least another couple of years before prices stabilize, he said the government could only intervene to help low-income households.
“The government can and does help increase benefits and raise pensions in line with inflation.”
He added that the focus should be on vulnerable groups who spend all their money on essentials and bills.
“The government will have to find a way to increase pensions.
“If pensions are not increased, then our pensioners will pay disproportionately for rising inflation,” Mavrides said.
“Interventions such as lowering the VAT on electricity and lowering the consumption tax on fuel are short-term solutions that the state cannot afford to support.”
He argued that in times like these, governments should focus on supporting low-income households and productive sectors of the economy such as farmers and livestock keepers.
He believes opposition calls for energy and finance ministers to issue decrees imposing a ceiling on prices for fuel and essential goods will only exacerbate the situation.
“Introducing a price ceiling on goods would be a disaster for the economy.
“If producers cannot make a profit, they will simply stop production, leading to shortages and further pushing up prices.“The best regulator in such cases is competition.”
MP DISY said that interest rates, regulated by the European Central Bank, could rise slightly to curb inflation. At the same time, he said that Cyprus should turn to renewable energy sources.
“Energy prices will stabilize if and when the conflict between Russia and the West ends or the fuel-producing countries increase production.
“One way or another, fuel prices will stabilize and possibly even fall. However, this will not happen until a couple of years later.”
Prices could be lowered if the international community decides to take steps such as lifting sanctions on oil-producing countries like Iran and Venezuela, he said, but such a move is unlikely.
“Recent developments add to the list of reasons why Cyprus needs to move towards cleaner energy solutions,” Mavrides said.
“The government is promoting a number of household incentive schemes to install solar panels to increase the share of renewables in the island’s energy mix and reduce household energy costs.”
He argued that more needs to be done to facilitate the transition to a greener economy.