Nicosia: Every reform should place productivity at its core, as productivity gains strengthen growth potential, the Governor of the Central Bank of Cyprus, Christodoulos Patsalides, said on Tuesday in his address to the EU Independent Fiscal Institutions (EUIFI) Conference, in Nicosia, titled 'Fiscal management in changing times: the initial responses'.
According to Cyprus News Agency, Patsalides highlighted the challenges Europe has faced due to a series of exceptional shocks in recent years. He noted that while the European Central Bank's decisive rate hikes aimed to control inflation, they also resulted in elevated debt and reduced fiscal space. This situation is particularly concerning as Europe urgently needs investment in defense, technology, and climate transition. High debt levels and stretched public finances could lead to a repricing of sovereign risks and create strain in global bond markets.
Patsalides acknowledged that although European economies have shown resilience, growth remains subdued, and structural challenges persist. He emphasized that the current environment presents additional challenges to Europe's growth model. He questioned how fiscal policy should respond to these challenges and argued that the answer is clear: Governments should prioritize investments that enhance productivity, competitiveness, and strategic priorities while consolidating public finances.
He pointed out that the new economic governance framework and EU fiscal rules offer member states the opportunity to extend their fiscal adjustment period to seven years, provided they commit to public investment and structural reforms that bolster productivity and long-term growth. Patsalides cited studies showing that increased spending on infrastructure and education, while maintaining overall public spending, could lead to significant long-term growth gains. Such measures are also crucial for central banks, as a low-growth environment complicates their work. Reforms that increase potential output could ease debt reduction and reduce long-term inflation pressures.
The Governor stressed the importance of addressing Europe's structural impediments to growth and promoting initiatives to unlock growth potential. He advocated for completing the Banking Union, promoting the Savings and Investment Union, and strengthening the single market through financial market integration. Removing internal barriers within the Single Market could significantly enhance the scaling up of new technologies.
Turning his attention to Cyprus, Patsalides noted the country's favorable fiscal position due to stronger GDP growth and robust fiscal surpluses. He urged authorities to utilize this position to direct investments toward boosting productivity and long-term growth. As a small, open economy vulnerable to external shocks, Cyprus has an additional reason to maintain sufficient fiscal buffers.
Patsalides emphasized that fiscal discipline alone is insufficient. While maintaining fiscal buffers is essential, he advocated for smarter spending, investments in green and digital transitions, and reforms to foster productivity and long-term growth. Striking a balance between fiscal buffers and growth is crucial to avoid 'fiscal stagnation,' where maintaining fiscal buffers comes at the expense of productive investments.
In conclusion, Patsalides highlighted the role of Fiscal Councils in identifying vulnerabilities and enhancing transparency and accountability in fiscal planning.