February 08, 2007

A more serious note on the Euro

AKEL’s main (or stated) fear with introducing the euro comes from the potential rise in prices when translating from pounds to euros (something that happened to some extent in Greece). The (unstated) fear is that TeePee will be untouchable with his campaign right after the euro is introduced. The campaign will be a tangible testament to the Europeanisation of StravaraLand and will offer implicit hopes of a forthcoming European solution.

The unstated fear is reasonable but there is nothing AKEL (or any other political party) can do about that. They simply will play the game with TeePee having an unfair advantage, they 'd better get used to that fact.

Moreover, this unfair advantage will be even worse when households will discover that the different prices will actually be reduced, rather than increase, as AKEL is fearing. They will decrease because only now is globalization (through European integration) coming to Stravaraland. Very soon Stravaraland will boast its very own IKEA, its very own LIDL, and other big superstores that will be pushing down prices as nothing that the island has seen before. The main difference with Greece is that Greece entered the EU in 1981 and did not enter the eurozone until 2001, a full 20 years later. By that time, all the positive changes from being part of a bigger EU market, the increase in competition and the concomitant decrease in prices had taken place. Stravaraland, on the other hand, has not had sufficient time from 2004 to 2008 to attract sufficient foreign investment to push down prices. Prices have fallen (as shoppers at Carrefour will testify) but by nowhere as much as they are still going to fall.

Prices will fall for goods that economists call “tradeables”, goods that can be traded easily (like cars, toilet rolls, all the good things that Stravaralanders know how to import for consumption). The prices of “non-tradeables” (stuff like haircuts or cappuccinos at Starbucks) might be more tricky to predict. But even the prices of these products, I dare say, will not increase much. They will not increase because even in the rest of the EU, the range of total increases from the introduction of the euro has been around 0.1 to 0.3 percent according to the European Central Bank. In the case of Stravaraland, because one pound can buy more than one euro, (as opposed to 2000 italian lira or a few million drachmas), the ability to push prices upwards by a large amount without pissing customers off will not be great. Even if it happens, the effect will be small. If one takes the average between tradeables and non-tradeables, I predict that the CPI (the consumer price index, ie the total index of prices) will actually fall after Stravaraland enters the eurozone.

There is one caveat which is unrelated to all the arguments AKEL has mentioned, which is the decrease in interest rates to eurozone averages. That will be inflationary (especially for house prices and land) for Stravaraland, but this is unrelated to all the arguments we have heard. This, indeed, is a disadvantage from introducing the euro because it means the loss of independence in setting interest rates in response to domestic conditions. If the Stravaraland economy is growing above average, an even lower interest rate due to events in Germany, say, will be inflationary. But this, the only logical argument that economists will accept, is the only argument I have not heard being made in Stravaraland! (The economists who understand this argument happen to be on the anti-AKEL camp, so will not offer the argument to AKEL for free, they simply do not believe in comradely love).

On the other hand, this disadvantage is probably outweighed by the potential political benefits stemming from eurozone membership (like making obsolete the relevant Anan plan chapters on currency and central banking by events on the ground). Any future plan will not have to deal with these issues any more.

Overall, there might be some trouble from the introduction of the euro but not due to any of the reasons AKEL has pointed out. I am sure the comrades will self-congratulate themselves whatever happens, regardless. They have been especially good at it in the last 4 years, for much more cement-like issues, so I am sure this euro-fudge will be a much easier hole to dig out of.

7 Comments:

Anonymous m said...

I was actually reading an article in the Cy Mail a few weeks ago, that predicted an analogous scenario. Cyprus is more like Ireland that had a stronger currency than the euro, rather than Greece. In Ireland people have found that inflation has not risen a lot and in fact purchasing power has increased. As far as interest rates, this is a bit more unpredictable, although my guess is that since Germany pretty much dictates the european economy anyway, that interest rate fluctuation internally would not make that much of a difference anyway. Yes, its about time competition brought prices down here, look out for many more "thiefs" to close down...

09 February, 2007 08:31  
Blogger zappa said...

I seriously think that the whole economic buble will go down

cy prices will deteriorate, shure.
But so will salaries, pentions and insurance coverage....thats the other side of the coin

09 February, 2007 16:23  
Blogger apodimos Kypreos said...

Dont see the connection really between euro and the salaries.

As for the other problems, pension and health expenses, the euro did not generate these problems but will actually force the state to do something about them

09 February, 2007 17:36  
Blogger zappa said...

thing is those are not generated by the euro
those are generated by the very nature of the EU

09 February, 2007 17:41  
Blogger apodimos Kypreos said...

So, what are you suggesting?

(Not that I agree with what you are saying, maybe you listen to Stavros Evagorou or Andros Kyprianou a bit too much?)

But for the sake of argument, what is your suggestion for a solution to such potential problems?

09 February, 2007 17:49  
Blogger zappa said...

well the solution is for the cyprus public to open its eyes and see whats going down in the rest of europe and react....its not gonna be long before they try to pass cpe-type laws in cyprus....prob is that akel and mr eyagorou will do totally zip about those problems, while they will be trying to maintain the "leftist" profile that AKEL uses.......... Generally the official left of Cyprus is in such shambles (if not in-existant) that the only solution would be the forming of a revolutionary party, in the manner of the bolsheviks

09 February, 2007 18:40  
Blogger apodimos Kypreos said...

Good luck!

Just beware not to get another Stalin in power!

At least I am an apodimos...

09 February, 2007 19:10  

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