Asked last week to comment on the situation, Finance Minister Charilaos Stavrakis, replied, “I am on holiday. I cannot talk. Thank you.” Well, the holiday is well and truly over for Cyprus, thank you very much. And while government ministers may try to eke out a few more days away from the public glare, there is nowhere left to hide once they return to their desks.

The danger of course, lies in the favourite recourse to denial, a collective burying of heads firmly in the sand, in which government, opposition and trade unions are complicit, none of them willing to face the grim reality of unpopular remedial action. After all, the last forecast issued by the authorities in May continued to insist that annual growth would stand at 1.0 per cent in 2009 – which would have made Cyprus the only country in the euro zone to escape recession. Only last December, Minister Stavrakis spoke of Cyprus as a “financial oasis” in the global economic storm – a startlingly optimistic scenario given Cyprus’ vulnerability to external economic forces, with the three pillars of its economy, tourism, property and financial services, all heavily dependent on foreign cash.

The government can no longer play with figures: if the first two quarters were down, there is little doubt that the year will end in recession, with the slump in tourism severely depressing third quarter figures. Tourism accounts for 10 per cent of GDP, and the best it can now hope for is moderate recovery next year, praying for improved sentiment in its main UK market.

In the first six months of 2009, public sector expenditure rose by 13.2 per cent, while total revenues fell 4.1 per cent. Those revenues will fall further in the second half of the year, making current spending levels unsustainable. There are signs that the government has realised the party’s over: while the first reaction to the global economic crisis last year was to spend its way out of trouble – an acknowledged economic stimulus that coincided with the Communist administration’s preference for big government, pumping money into grand public projects and handing out generous social assistance – ministers have now begun to make noises about cuts.

A couple of weeks ago, the Finance Minister spoke of public sector savings (though his suggestions were no more than tinkering at the edges), while now the Public Works Minister has said a number of major projects will have to be put on hold in cuts that could yield savings as high as half a billion euros. But axing major projects – while significant – will only produce a one-off saving, while Cyprus needs to make long-term, sustainable cuts in public spending that will allow the government to undertake necessary infrastructure investments once the worst is over.

A huge share of spending goes on the civil service wage bill (proportionally one of the biggest in the EU), yet this is the hardest saving of them all, because of the vested interests involved in maintaining the public sector status quo. The merest hint of a wage freeze earlier this month sparked a furious reaction from public sector unions, while IMF recommendations to axe or at least reform the Cost of Living Allowance (CoLA) that delivers pay rises, year in year out, have provoked an almost universal defence of the mechanism.

Yet the fact is that CoLA is a major burden on the public wage bill, as well as shackling competitiveness in unionised areas of the private sector, delivering six-monthly pay rises irrespective of performance and productivity. And while the unions rise to its defence as a protection for the most vulnerable, the irony is that it is the best paid that benefit the most, while those at the bottom of the scale see only negligible rises.

It is not public works that are gobbling up precious tax revenues so much as civil service wages. Abolishing or at least reforming CoLA would be an important first step in reining in those costs, while delivering the added benefit of a private sector at last free to regain a competitive edge dragged down by inexorably rising labour costs. Which other move could simultaneously save public funds and stimulate the private sector? This is a chance for the government to show real leadership by overriding vested interests for the greater good. Will it take that chance, or will it continue to wriggle its head in the sand, hoping the problems will just go away?

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