What Happened in Cyprus? The Economic Consequences of the Last Communist Government in Europe

Athanasios Orphanides

No 79, IMFS Working Paper Series from Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS)

Abstract: This paper reviews developments in the Cypriot economy following the introduction of the euro on 1 January 2008 and leading to the economic collapse of the island five years later. The main cause of the collapse is identi?ed with the election of a communist government in February 2008, within two months of the introduction of the euro, and its subsequent choices for action and inaction on economic policy matters. The government allowed a rapid deterioration of public finances, and despite repeated warnings, damaged the country’s creditworthiness and lost market access in May 2011. The destruction of the island’s largest power station in July 2011 subsequently threw the economy into recession. Together with the intensification of the euro area crisis in the summer and fall of 2011, these events weakened the banking system which was vulnerable due to its exposure in Greece. Rather than deal with its ?scal crisis, the government secured a loan from the Russian government that allowed it to postpone action until after the February 2013 election. Rather than protect the banking system, losses were imposed on banks and a campaign against them was coordinated and used as a platform by the communist party for the February 2013 election. The strategy succeeded in delaying resolution of the crisis and avoiding short-term political cost for the communist party before the election, but also in precipitating a catastrophe right after the election.

Keywords: Cyprus; euro area; crisis; sovereign debt; populism. (search for similar items in EconPapers)
JEL-codes: D72 E32 E65 F34 H12 H63 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-cis, nep-eec, nep-mac and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Related works:
Chapter: What Happened in Cyprus? The Economic Consequences of the Last Communist Government in Europe (2016)
Working Paper: What Happened in Cyprus? The Economic Consequences of the Last Communist Government in Europe (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:imfswp:79

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