By Andreas Charalambous and Omiros Pissarides
The main challenges currently facing the EU are sluggish growth, low levels of investment, slow adaptation of technology, tight labour markets, as well as over-reliance on conventional forms of energy from third countries, which creates inflationary pressures. Moreover, there is no clear consensus on the direction of fiscal policies. As a consequence, the gap between the EU and the US is expected to continue widening.
The economic performance of Cyprus, from a short- and a medium-term perspective, is considered satisfactory, however, there are significant challenges of a long-term nature. Productivity and productive investments are comparatively low, the balance of payments exhibits chronic and sizeable deficits, while there are serious delays concerning the green and digital transitions.
The necessity, therefore, to accelerate the pace of reforms and to commit to increased private and public investments is evident, both in the EU and Cyprus. This is acknowledged in practice by the EU institutions, and member states are encouraged to implement ambitious structural reforms, supported through substantial funding, at favourable terms, by the Resilience and Recovery Fund.
The European Commission’s assessment of the effectiveness of national resilience and recovery programmes is currently under way. The preliminary results reveal a significant absorption of the relevant funds, however, they also indicate an underachievement of the main reform objectives.
The most important reason behind this underperformance is the growing resistance to structural reforms and the green and digital transitions.
One specific factor fuelling strong opposition, and whose importance appears to be increasing, is immigration. Most analysts would consider immigration, under the right conditions, necessary in order to address the severe labour shortages in high- and low-skilled occupations. However, the rapidly rising immigration flows, the limited capacity to absorb immigrants and insufficient planning have led to the creation of “parallel societies”, fuelling the rise of populist movements in many European countries.
Additional factors fuelling discontent and the negative impression the public has about reforms include the following:
Firstly, reforms and investments take time to yield tangible results. Unfortunately, a significant proportion of voters are guided by short-term considerations, focusing their attention on initial costs and disregarding the fact that these are outlays of a transitional nature.
Secondly, it has been observed that radical changes contribute to a sense of insecurity and risk aversion in wider segments of the population. This holds true for most reforms, as well as the politically sensitive issue of immigration.
Policy approaches which are recommended to address these challenges include: (a) designing a serious multidimensional policy that takes into account and addresses the challenges in a tangible manner; (b) attaching emphasis on transparency and comprehensively addressing widespread perceptions of citizens, through a professionally guided and targeted communication strategy, and (c) taking compensatory measures and strengthening the social fabric, for the benefit of those parts of the population which are vulnerable and/or affected disproportionately.
Taking the above into consideration, the EU’s fiscal policy framework must be adapted to the current circumstances, in order to maximise the probability of success of the necessary reforms.
Andreas Charalambous and Omiros Pissarides are economists
