Cyprus Faces Tough Austerity Measures Following Euro Bailout

Cyprus is the fifth Eurozone member to receive emergency funding following the need to recapitalise its major banks who sustained big losses caused by Greece’s debt restructuring in March.  Cyprus is chasing a second loan from the Russian government to add to the €2.5 billion it received last year and is also looking to china for aid. 

The plight of Cyprus highlights the shortcomings of the EU fiscal and monetary policy. Prior to joining the EU in 2008, Cyprus had impeccable credentials and was operating a budget surplus of 3.5% with government debt amounting to 59% of GDP.  Last year, Cyprus fell foul of EU rules after reporting a budget deficit of 6.3% and public debt of 72%. The country will now face tough austerity measures in order to meet it’s EU targets. 

Households and businesses in Cyprus have very high levels of private indebtedness meaning that the country is vulnerable to the slowdown in the economy and rising levels of unemployment. Unemployment was less than 4% when Cyprus joined the Euro, now it has risen to 10%. Such increases mean that households and businesses will struggle to meet their debts. The danger is that austerity measures could prove too strong for an economy struggling to bring down its private debts.