The European Commission will not step up macroeconomic imbalance procedure for Cyprus, under European Semester 2017

The European Commission decided today not to step up the macroeconomic imbalance procedure for Cyprus, under the spring package of the European Semester 2017 – the preventive arm of the Stability and Growth Pact. Commissioner Moscovici presenting the decision clearly stated that the Commission believes that the national reform program submitted by the government is ambitious enough. The European Commission has been deliberating with the Cyprus authorities since February 22nd 2017, on a text explaining what the imbalances entail. Todays decision is provisional upon completion of the national reform agenda.

According to a written statement the package presented today takes account of the conclusions of and follows up on Februarys European Semester Winter Package, including on the Macroeconomic Imbalances Procedure. For Cyprus, Italy and Portugal, which were experiencing excessive macroeconomic imbalances, the Commission concluded that there is no analytical ground for stepping up the procedure, provided that the three countries fully implement the reforms set out in their country-specific recommendations.

It is worth noting that the 22nd of February recommendations stated “Cyprus is experiencing excessive imbalances, including a very high share of non-performing loans burdens the financial sector and high stock of private, public, and external debt hangs on the economy, in the context of high unemployment and weak potential growth”.

According to the 22nd of February text “the current account is still negative and is not adequate to guarantee a sustainable evolution of the net external liabilities stock. Government debt is expected to have peaked, but the current relaxation of fiscal policy is foreseen to slow down the needed adjustment”.

The EC then noted that “despite a major restructuring of the banking sector and improved capital positions, the stock of non-performing loans is slowly declining but remains very high. Poor contract enforcement, inefficiencies in the judicial system and bottlenecks in the implementation of the foreclosure and insolvency legislation hamper private sector deleveraging and the reduction of non-performing loans”.

The assessment was that “reform momentum has weakened since 2016 and policy gaps persist in the areas of public administration, fiscal management, the justice system, the framework for title deeds, electricity and privatization”.

Now the EC says that Member States, including Cyprus, should use the window of opportunity offered by the economic recovery to pursue structural reforms, boost investment and strengthen their public finances. Priorities vary across the EU but further efforts across the board are essential to achieve more inclusive, robust and sustainable growth.

In broad terms the European economy has proven resilient in the face of significant challenges; reflected in growth rates of nearly 2 % in both the euro area and the EU in 2016, improving public finances and employment levels at a record of nearly 233 million people. Unemployment is at its lowest level since 2009 and investments exceed pre-crisis levels in some Member States � also helped by the Investment Plan for Europe, the so-called Juncker Plan.

According to the European Semester 2017, although economic conditions in the euro area and the EU are improving, challenges remain: slow productivity growth and the legacies of the crisis, including disparities within and across countries, continue to weigh on the economy, as does uncertainty stemming mostly from external factors.

The Commission therefore calls on Member States to use this window of opportunity to strengthen the fundamentals of their economies by implementing the economic and social priorities identified in common at European level – boosting investment, pursuing structural reforms and ensuring responsible fiscal policies. Particular attention is paid to the challenges and priorities identified for the euro area. Priorities vary across the EU but further efforts across the board are essential to achieve more inclusive, robust and sustainable growth.

Source: Cyprus News Agency