NICOSIA: An exit from the eurozone may look tempting for Cyprus in the throes of economic collapse but it poses a high-risk option for an island economy heavily reliant on imports, analysts say.
The Institute of International Finance, which represents the world’s largest banks, said it would be “much easier” for the small EU state to bounce back through a devaluation, something which is not an option in the eurozone. Paul Krugman, an American laureate of the Nobel Prize for economics, says “Cyprus should leave the euro, now” on his blog.
“Leaving the euro, and letting the new currency fall sharply, would greatly accelerate” rebuilding by allowing agricultural exports and the key tourism sector to be more competitive, he writes.
But Marios Zachariadis, a professor of macro-economics at the University of Cyprus, cautions that the country is heavily dependent on imports, which would become much more expensive.
Cyprus imports four times more than it exports, leaving behind a trading deficit of more than ¤4bn ($5bn) for an economy with a GDP of ¤17bn.
“The increased cost of all imported inputs would actually make these sectors (agriculture, tourism) less competitive, unless you cut down the wages really low,” Zachariadis said.
Alexander Michaelides, a professor of finance at the university, points out that the tourism sector is already running at full capacity.
“We cannot expect to get more than the two million tourists (a year) who already come, so a devaluation would in fact decrease the revenue while doubling the costs, as this sector is heavily dependent on petrol,” he said.
The Greek Cypriots, who adopted the euro in 2008, were sceptical of the single currency even before the crippling terms were hammered out for an EU bailout aimed at rescuing their island from bankruptcy.
A November 2012 poll carried out by the European Commission showed only 48 percent of the population were in favour of the euro.
With unemployment shooting up and austerity measures kicking in, “public opinion will grow in favor of leaving the euro,” forecasts Fiona Mullen, an analyst with the economic consultancy firm Sapienta.
AFP
