Every reform should place productivity at its core, as productivity gains strengthen growth potential, the Governor of the Central Bank of Cyprus, Christodoulos Patsalides, has said.
His address was to the EU Independent Fiscal Institutions (EUIFI) Conference, in Nicosia on 10 February, titled “Fiscal management in changing times: the initial responses”.
Noting that over the past few years, Europe has faced an exceptional sequence of shocks, he said that ECB’s intervention, with the decisive rate hikes to tame inflation, came at a cost: “elevated debt and reduced fiscal space, at a time when Europe urgently needs investment in defense, technology, and climate transition. High debt and stretched public finances could trigger a repricing of sovereign risks and create strain in global bond markets”, he warned.
Patsalides stated that, although European economies have shown resilience, growth remains subdued, and structural challenges persist. Additionally, the current environment seems to place further challenges to Europe’s growth model.
“How should fiscal policy respond to these challenges?” he wondered, arguing that the answer is well-known. “Governments should prioritize investments in productivity gains, targeted spending in areas which enhance competitiveness, support potential growth and strategic priorities while consolidating their public finances”.
He added that we have the tools to do so, mentioning the new economic governance framework and the new EU fiscal rules that give member states the opportunity to extend their fiscal adjustment period to as long as seven years, if they commit to public investment and structural reforms that strengthen productivity and long-term growth.
“Studies have shown that increasing spending in infrastructure and education while maintaining overall public spending constant could lead to sizeable long-term growth gains,” the CBC Governor continued, noting that such measures also matter for Central Banks, as a low-growth environment can render the job of central banks more difficult. “It is argued that reforms which increase potential output would not only ease debt reduction but would also reduce inflation pressures in the long run,” he highlighted.
Moreover, he said, “we should collectively address Europe’s structural impediments to growth and promote initiatives that would unlock our growth potential”. In this direction, he added, “it is high time to complete the Banking Union, promote the Savings and Investment Union and strengthen the single market, including through financial market integration”.
Removing barriers would enable scaling up in new technologies, the Governor argued, quoting the IMF, that internal barriers within the Single Market are equivalent to a 45% tariff on goods and a 110% tariff on services.
Conversely, the so called 28th regime should be put in place, allowing innovative firms to operate, trade and raise financing seamlessly across the EU, as is the case on the other side of the Atlantic, he stressed.
Turning to Cyprus, the Governor noted that owing to stronger GDP growth and robust fiscal surpluses, the country’s public debt has been placed on a firmly downward trajectory. “The authorities should utilize the favourable fiscal position to direct investments to boost productivity and long-term growth. Every reform should place productivity at its core, as productivity gains strengthen growth potential”, he said, adding that Cyprus has an additional reason to maintain sufficient fiscal buffers as it is a small, open economy, vulnerable to external shocks.
Moreover, Patsalides said that fiscal discipline alone is not enough. “We should maintain fiscal buffers in case of headwinds, but we should spend smarter, invest in green and digital transitions and promote reforms that would foster productivity and long-term growth. We need to strike a balance between maintaining fiscal buffers without stifling growth. Otherwise, we run the risk of what has been dubbed as “fiscal stagnation,” that is, prioritizing on maintaining fiscal buffers at the expense of productive investments”, he said.
In this context, Fiscal Councils have a role to play, identifying vulnerabilities and enhance transparency and accountability in fiscal planning, he mentioned.
(Source: CNA)
