CoLA deal a pyrrhic victory, say economists
THE AGREEMENT brokered by Labour Minister Sotiroulla Charalambous to exempt companies from granting pay rises other than those pegged to inflation through the Cost of Living allowance (CoLA) could create more problems than it solves, say economists.
While the agreement between the Employers and Industrialists Federation, OEV, and two major trade unions, SEK and PEO eliminates the risk of industrial action, it could add more burdens to the already struggling economy.
"It neither safeguards the robustness of enterprises nor serves the workers as a whole," economist Spyros Episkopou, chief executive officer of Epicentral Consultancy told the Sunday Mail.
The deal would only serve those with jobs and who benefit from inflation compensation, Episkopou added.
Cyprus’s enterprises are not particularly competitive, reflected in the size of the current account deficit, said academic Alexander Michaelides. Maintaining the wage indexation system, also known as the cost of living allowance, does not help, Michaelides said.
"When unemployment rises above 9 per cent and the trend continues, it seems that by insisting on CoLA, unions haven't got it that they are risking more jobs," said Michaelides, director of the Centre of Banking and Finance at the University of Cyprus.
The deficit of Cyprus's current account, which reflects all flows of goods, services and transfers with the rest of the world, is expected to narrow to 5.0 per cent of gross domestic product by 2014 from 7.8 per cent in 2010, a reflection of the slowdown in demand and economic output. It had peaked at 17 per cent in 2008.
Sotiris Fellas, deputy secretary general at PEO, said that the indexation of wages to inflation is not linked to unemployment. "This is demonstrated in the development of unit labour costs," he said.
In the third quarter of 2011, Cyprus's unit labour costs rose 1.3 per cent compared to a year before, according to the European Central Bank. In the eurozone, unit labour costs rose 1.6 per cent in the same period. This meant that Cyprus's competitiveness improved compared to that of the eurozone in that period.
However, the long-term development of unit labour costs in Cyprus shows an alarming picture. From the fourth quarter of 1998, immediately before the launch of the euro, the single currency bloc's unit labour cost fell 5.5 per cent, while in Cyprus it rose 9.6 per cent.
The increase was nearly 12 per cent in Greece, 9.4 per cent in Ireland and 7.3 per cent in Portugal.
Fast forward more than a decade later, all three countries were, like Cyprus, shut out of financial markets and had to resort to an international bailout in the last two years. In Germany, the eurozone's largest economy which is de facto dictating bailout terms, they fell almost 19 per cent.
As a result, Cyprus is one of the most expensive countries for production in the eurozone; its unit labour costs index stood in the third quarter of 2011 at 111.6, compared to 107.7 in Greece, 106.6 in Portugal and was close to that of Ireland's 115.8.