1. What does the reintegration mean in concrete procedural terms?
1.1 Catching up with the European Semester's previous steps
The 2016 European Semester Cycle started last November with the publication of the Annual Growth Survey. At the same time, the European Commission launched the macroeconomic imbalances cycle. Focussing on structural challenges for the economies of the Member States, the Macroeconomic Imbalances Procedure is an integral part of the European macroeconomic surveillance.
Cyprus is now joining this ongoing process. To catch up with the steps already taken for other Member States under the European Semester, the Commission is today publishing a Country Report for Cyprus including an in-depth review that assesses the country's situation in the context of the European Semester and under the Macroeconomic Imbalances Procedure.
The Commission published the Country Reports for all other countries (except Greece) in the European Semester context on 26 February.
Along with five other Member States, Cyprus is considered still to be experiencing excessive imbalances. An updated overview of the macroeconomic imbalances across the EU Member States can be found here.
The Commission thus is also amending today its Communicationof 8 March on the assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation No 1176/2011.
In the 8 March Communication, the Commission presented its conclusions regarding progress under the European Semester, as well as for 18 Member States an in-depth review. Cyprus was not included in this batch of assessments as its financial assistance programme was still ongoing. Today's amendment therefore completes the 8 March Communication by adding references and conclusions regarding Cyprus.
1.2 Next steps
The next steps will be fully aligned with the regular calendar of the European Semester.
Later this month, Member States, including Cyprus, are expected to present their National Reform Programmes and their Stability Programmes (for euro area countries) or Convergence Programmes (for non-euro area countries). Based on these and on its spring economic forecast, the Commission will present later this spring its proposals for a new set of country-specific recommendations, outlining the key challenges to be addressed.
This will mark the fully-fledged reintegration of Cyprus into the Semester process. For the first time after the programme, the European Commission will prepare recommendations to Cyprus in line with the normal processes applicable to all Member States. Progress in addressing these recommendations will be assessed in the framework of the European Semester cycle.
Finally, in autumn, Cyprus will also be expected to submit a Draft Budgetary Plan for 2017. In accordance with Regulation No 473/2013, the EU countries that share the euro as their currency submit Draft Budgetary Plans to the European Commission. The Commission assesses whether the Plans are compliant with the obligations of the euro area Member States under the Stability and Growth Pact.
2. Economic and fiscal assessment of Cyprus during the programme period
2.1 Why does an assistance programme mean a country is exempt from the regular European Semester coordination process?
A country under an economic adjustment programme is already subject to enhanced surveillance. For instance, the programme includes regular reviews of its implementation. In order not to duplicate procedures and reporting obligations, countries in a programme are therefore exempt from the Semester for the duration of the programme.
During the Cypriot programme, eight reviews took place. Progress and remaining challenges were discussed during those review missions. The findings and conclusions were regularly reported and published through end-of-mission statements and compliance reports.
2.2 Programme's objectives
Following a request by Cyprus on 25 June 2012, the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) agreed an Economic Adjustment Programme with the Cypriot authorities on 2 April 2013. The euro area Member States agreed the programme on 24 April 2013. The IMF Board agreed the programme on 15 May 2013. Up to EUR 10 billion was earmarked for the programme, out of which up to EUR 9 billion was to be provided by the ESM. The IMF was expected to contribute around EUR 1 billion.
The programme was designed to address short and medium-term financial, fiscal and structural challenges facing Cyprus. The key programme objectives were:
- to restore the soundness of the Cypriot banking sector and rebuild depositors' and market confidence by thoroughly restructuring and downsizing financial institutions, strengthening supervision and addressing expected capital shortfalls, in line with the political agreement of the Eurogroup of 25 March 2013;
- to continue the on-going process of fiscal consolidation in order to correct the excessive general government deficit as soon as possible, in particular through measures to reduce current primary expenditure, and maintain fiscal consolidation in the medium term;
- to implement structural reforms to support competitiveness and sustainable and balanced growth, allowing for the unwinding of macroeconomic imbalances.
Cyprus received EUR 6.3 billion from the ESM in the form of loans over the programme period. In all, 30% of the earmarked funds was not used in the programme. A further €1 billion was available under the IMF programme.
2.3 Main programme achievements
During its programme, Cyprus has taken important steps to secure financial stability and to achieve a gradual return to the markets. The results of the programme show:
- Following three consecutive years of contraction in GDP, growth resumed in Cyprus in 2015. According to the European Commission's 2016 Winter Forecast, GDP growth is expected to have been 1.4% in 2015 and is projected to gain moderate pace at 1.5% in 2016 and 2% in 2017.
- Fiscal performance has exceeded expectations, as Cyprus is projected to correct its excessive deficit in 2015, with a general government budget balance of -1% of GDP (numbers will only be confirmed by Eurostat in late April). It is also expected to achieve small surpluses in the following years (0.1% in 2016 and 0.4% in 2017). The Commission will assess in spring the situation of Cyprus with regard to the correction of its excessive deficit.
- The Cypriot banking sector has undergone deep transformation and restructuring since 2013. Banking supervision has been strengthened and the two biggest banks are now supervised by the Single Supervisory Mechanism (the ECB), while banks have downsized their balance sheets. Depositor confidence has also been restored and banks now benefit from stronger liquidity buffers.
- Unemployment is falling. Unemployment rose sharply from about 5% before the crisis to around 16% in 2013 and 2014. The trend reversed in 2015 and Cyprus registered the largest decrease in unemployment in the EU over one year (from 16.6% in February 2015 to 12.6% in February 2016). Yet, youth unemployment and in particular long-term unemployment remain relatively high.
Significant progress was also made in several other domains with regard to fiscal-structural reforms, which will help to make public finances sustainable. These include reforms in three key areas: public financial management, the pension system, and revenue administration.
2.4 Remaining challenges
Despite this progress, some challenges remain. As the Eurogroup statement of 7 March recalled, a number of issues require immediate attention and further action from the Cypriot authorities, even after the programme ends, such as the management of the high share of non-performing loans and the need to progress with the implementation of the insolvency framework and foreclosure laws adopted in 2015. Moreover, the last "prior action" of the programme, which is the privatisation of the Cypriot Telecommunications Authority (Cyta), was not completed (but may follow after the May elections).
More generally, investment is still limited by high corporate debt and productivity performances remain relatively low, and the employment and social situation remains a source of concern.
Today's Country Report highlights a number of remaining challenges that remain to be addressed, notwithstanding the success of the Cypriot programme.
3. Economic and fiscal assessment of Cyprus after the programme period – in the context of the regular European Semester framework
3.1 How does the Country Report published today link with the programme achievements and remaining challenges?
The Country Report takes into account the programme achievements and remaining challenges. Already in 2015 there was a Country Report for Cyprus to provide a synthesis of progress in implementing the programme.
This year's report explains how the macroeconomic adjustment programme completed in March 2016 was instrumental in containing economic risks and imbalances. The report also depicts the legacy issues left by the crisis that are exposing the Cypriot economy to risks.
3.2 What is the outcome of the assessment of Cyprus' situation in the context of the MIP?
Cyprus is considered to be experiencing excessive macroeconomic imbalances, as defined in the context of the MIP. It is characterised by large private, public, and external debt overhang, in the context of still relatively high youth and long-term unemployment. As indicated above, vulnerabilities remain in the financial sector, for instance to tackle non-performing loans. In the case of loans to households and non-financial corporations, the non-performing loans ratio is around 55%, putting constraints on new credit. Reducing non-performing loans will require increasing efforts to restructure debt and to effectively use the insolvency and foreclosure frameworks.
Structural and fiscal reforms also must be continued to ensure sustainable growth, sound public finances, and private sector deleveraging.
Cyprus is one of six Member States found to have excessive imbalances. The other five are: Bulgaria, Croatia, France, Italy and Portugal.
All Member States found to have imbalances or excessive imbalances will be subject to specific monitoring adapted to the degree and nature of the imbalances.
3.3 Fiscal assessment
Cyprus' obligations under the Stability and Growth Pact (SGP) will be assessed in the context of the Excessive Deficit Procedure (EDP).
The EDP deadline for Cyprus to correct the excessive budget deficit is 2016.
The Commission will carry out an assessment of Cyprus' situation in the context of the EDP in May, taking into account final 2015 budgetary data validated by Eurostat, the medium-term budgetary plans provided by the Stability Programme and findings from our Spring Economic Forecast.
3.4 Post-programme surveillance (PPS)
The Commission will continue its monitoring of the commitments under the programme, in liaison with the ECB. Article 14 of the Two-Pack Regulation (Regulation No 472/2013) requires the Commission to conduct post-programme surveillance (PPS) at least until a minimum of 75% of the financial assistance received is repaid by a programme country.
Under PPS, the Commission, in liaison with the ECB, conducts bi-annual review missions in the Member State to assess its economic, fiscal and financial situation.
3.5 Support provided by the Structural Reform Support Service
The Commission continues supporting the Cypriot authorities with dedicated technical assistance through its Structural Reform Support Service to help implement important growth-enhancing administrative and structural reforms.
This service, under the responsibility of Vice-President Dombrovskis, builds on the expertise from across the Commission, Member States and international bodies.
This service has been up and running since 1 July 2015.