EN    EN EN 
EN    EN  EUROPEAN COMMISSION 
Brussels, 15.6.2010 
SEC(2010) 740 final 
  
Proposal for a 
COUNCIL DECISION 
on the existence of an excessive deficit in Cyprus 
EN 2   EN EXPLANATORY MEMORANDUM  
1. T HE APPLICATION OF THE STABILITY AND GROWTH PACT IN THE CURRENT CRISIS 
SITUATION  
Many EU countries are presently facing genera l government deficits above the 3% of GDP 
reference value set in the Treaty. The often stro ng deterioration in the deficit as well as the 
debt positions must be seen in the context of the unprecedented global financial crisis and 
economic downturn in 2008/09. Several factors are at play. First, the economic downturn 
brings about declining tax revenue and rising social benefit expenditure (e.g. unemployment 
benefits). Second, recognising that  budgetary policies have an impor tant role to play in the 
current extraordinary economic situation, the Co mmission called for a fiscal stimulus in its 
November 2008 European Economic Recovery Plan (EERP), endorsed by the European 
Council in December. The Plan explicated that  the stimulus should be timely, targeted and 
temporary and differentiated across Member States to reflect their different positions in terms 
of public finance sustainability and competitiveness and should be reversed when economic conditions improve. Finally, severa l countries have taken measures  to stabilise the financial 
sector, some of which have impacted on the debt  position or constitute a risk of higher deficits 
and debt in the future, alt hough some of the costs of th e government support could be 
recouped in the future. 
The Stability and Growth Pact  requires the Commission to in itiate the excessive deficit 
procedure (EDP) whenever the deficit of a Me mber State exceeds the 3% of GDP reference 
value. The amendments to the Stability and Gr owth Pact in 2005 aimed at ensuring that in 
particular the economic and budgetary background was taken into account fully in all steps in 
the EDP. In this way, the Stability and Growth Pact provides the framework supporting 
government policies for a prompt return to so und budgetary positions taking account of the 
economic situation, and thereby ensuring long -term sustainability of public finances. 
2. P
REVIOUS STEPS IN THE EXCESSIVE DEFICIT PROCEDURE  
Article 126 of the Treaty on the Functioning of the European Union lays down an excessive 
deficit procedure (EDP). This procedure is further specified in Council Regulation (EC) No 
1467/97 “on speeding up and clarifying the im plementation of the excessive deficit 
procedure”1, which is part of the Stability and Growth Pact. 
According to Article 126(2) of the Treaty, th e Commission has to monitor compliance with 
budgetary discipline on the basis of two criteria,  namely: (a) whether the ratio of the planned 
or actual government deficit to gross domestic  product (GDP) exceeds the reference value of 
3% (unless either the ratio ha s declined substantially and co ntinuously and reached a level 
that comes close to the reference value; or, a lternatively, the excess over the reference value is 
only exceptional and temporary an d the ratio remains close to the reference value); and (b) 
whether the ratio of government debt to GDP exceeds the reference value of 60% (unless the 
ratio is sufficiently diminishing and approachin g the reference value at a satisfactory pace). 
                                                 
1 OJ L 209, 2.8.1997, p. 6. The report also takes into account the “Specifications on the implementation 
of the Stability and Growth Pact and guidelines on the format and content of stability and convergence 
programmes”, endorsed by th e ECOFIN Council of 10 November 2009, available at 
http://ec.europa.eu/economy_finance/sgp/legal_texts/index_en.htm. 
EN 3   EN Article 126(3) stipulates that, if a Member St ate does not fulfil the requirements under one or 
both of these criteria, the Commi ssion has to prepare a report. Th is report also has to “take 
into account whether the government deficit ex ceeds government investment expenditure and 
take into account all other relevant factors, including the medium-term economic and 
budgetary position of the Member State”. 
On the basis of the data notified by  the Cypriot authorities in March 20102 and taking into 
account the Commission services’ spring 2010 forecast, the Commission adopted a report 
under Article 126(3) for Cyprus on 12 May 20103. 
Subsequently, and in accordance with Article 126(4), the Economic and Financial Committee 
formulated an opinion on the Commission report on 27 May 2010. 
3. T HE EXISTENCE OF AN EXCESSIVE DEFICIT  
According to data notified by the Cypriot au thorities in April 2010, the general government 
deficit in Cyprus reached 6.1% of GDP in 200 9, thus exceeding the 3% of GDP reference 
value. The Commission report under Article 126(3)  considered that the deficit was not close 
to the 3% of GDP reference value and that  the excess over the reference value can be 
qualified as exceptional within the meaning of th e Treaty and the Stability and Growth Pact. 
In particular, it results from a severe economic  downturn in the sense of the Treaty and the 
Stability and Growth Pact. Acco rding to the Commission services ’ 2010 spring forecast, real 
GDP in Cyprus is projected to shrink further,  although to a lesser extent, by almost ½% in 
2010 compared with 1¾% in 2009.However, the planned excess over the reference value cannot be considered temporary. According to  the Commission services’ spring 2010 forecast, 
the budgetary deficit is projected to reach a bout 7¾% of GDP in 2011 on a no-policy change 
basis. The deficit criterion in the Treaty is not fulfilled. 
According to data notified by the Cypriot au thorities in April 2010, the general government 
gross debt remains below the 60% of GDP re ference value and stood at 56.2% of GDP in 
2009. For 2010, Cyprus notified a planned debt of 62% of GDP, thus exceeding 60% of GDP 
Treaty reference value. The Commission services’ spring 2010 forecast projects debt to rise to 
62.3% of GDP in 2010 and further to 67.6% in 2011 on the back of a deteriorated primary 
balance. In view of these trends, the debt  ratio cannot be considered as diminishing 
sufficiently and approaching the reference value at a satisfactory pace within the meaning of 
the Treaty and the Stability and Growth Pact. The debt criterion in the Treaty is not fulfilled. 
In line with the provisions in the Treaty and the Stability and Growth Pact, the Commission 
also analysed in its report “relevant factors” . According to the Stability and Growth Pact, 
these can only be taken into acc ount in the steps leadi ng to the decision on the existence of an 
excessive deficit if the deficit satisfies the doubl e condition of closeness and temporariness. In 
the case of Cyprus, the double condition is not met. Considered on their own merit, the 
relevant factors in the current case on balance present a mixed picture. 
                                                
 
2 According to Council Regulation (EC) No 479/2009, Member States have to report to the Commission, 
twice a year, their planned and actual government deficit and debt levels. The most recent notification 
of Cyprus can be found at: 
 http://epp.eurostat.ec.europa.eu/portal/page/porta l/government_finance_statistics/excessive_deficit/edp_
notification_tables. 
3 All EDP-related documents for Cyprus can be found at the following website: 
 http://ec.europa.eu/ec onomy_finance/sgp/defic it/countries/index_en.htm. 
EN 4   EN The opinion of the Economic and Financial Committee in accordance with Article 126(4) of 
the Treaty is consistent with the assessment in the Commission report under Article 126(3).  
The Commission, having taken into account its report under Article 126(3)  and the opinion of 
the Economic and Financial Committee under Arti cle 126(4), is of the opinion that an 
excessive deficit exists in Cyprus. This  opinion, adopted by the Commission on [15 June 
2010], is herewith addressed to the Council according to Article 126(5). The Commission 
proposes that the Council shall decide accordi ngly, in conformity with Article 126(6). In 
addition, the Commission is submitting to the Council a recommendation for a Council 
Recommendation to be addressed to Cyprus with a view to br inging the situation of an 
excessive deficit to an end according to Article 126(7). 
4. R ECOMMENDATIONS TO END THE EXCESSIVE DEFICIT SITUATION  
According to Article 3(4) of Counc il Regulation (EC) No 1467/97, the Council 
recommendation under Article 126(7 ) has to establish a deadline of six months at most for 
effective action to be taken by the Member State concerned as well as a deadline for the correction of the excessive deficit, which “sho uld be completed in the year following its 
identification unless there are sp ecial circumstances”. Article 2(6) of the Regulation implies 
that the “relevant factors” considered in the Commission report under Article 126(3) of the 
Treaty have to be taken into account in deciding whether specia l circumstances exist. Article 
3(4) of the Regulation specifies  that the Council has to recommend that the Member State 
achieves a “minimum annual improvement of at  least 0.5% of GDP as a benchmark, in its 
cyclically adjusted balance net of one-off and temporary measures, in order to ensure the 
correction of the excessive deficit within the deadline set in the recommendation”. 
Special circumstances, which are relevant for the greater flexibility in the application of the 
EDP introduced with the 2005 reform of the Stabili ty and Growth Pact, ar e deemed to exist in 
the case of Cyprus. In 2009, for the first time in 35 years, ec onomic activity contracted, by 
1¾%. The recession reflected the significant fall  in domestic demand and an adverse external 
environment. In particular, high household i ndebtedness together with tighter lending 
conditions, a worsening labour market outlook and negative confidence effects led to a 
decline in private consumption. In parallel, inve stment recorded a strong correction, amidst a 
fall in foreign demand for housing, low capacity u tilisation and the restru cturing of corporate 
balance sheets. Moreover, export of goods and se rvices, especially tour ism, plummeted as a 
consequence of the financial cr isis and the global slowdown, in  particular the much lower 
growth prospects of the main  trading partners (Euro Area, United Kingdom, Russia). The 
deficit in 2009 is a consequence of both the economic downturn and th e stimulus measures 
taken in line with the EERP by the Cypriot authorities. 
Against this background, it is appr opriate to consider the correction of the excessive deficit in 
a medium-term framework with a deadline for the correction of 2012. Recognising that the 
deterioration of the Cypriot budgetary position in 2009 resulted from measures taken in 
response to the crisis, amounting to about 1½ % of GDP annually in 2009 and in 2010, which 
was an appropriate response in line with the Eu ropean Economic Recovery Plan, and the free 
play of automatic stabilisers, the Cypriot authorities should strengthen the fiscal strategy in 2010 with measures to control current expenditure . In particular, in view of the domestic and 
external economic imbalances, a credible and sustainable adjustment path would require the 
Cypriot authorities to ensure an average annual structural  adjustment of 1¾ percentage points 
of GDP over the period 2010-2012. It would also requi re the Cypriot author ities to specify the 
EN 5   EN measures that are necessary to achieve the correction of the excessive deficit by 2012, to 
ensure a swift reduction of the gross debt rati o below the reference value and accelerate the 
reduction of the deficit if economic or budgetary  conditions turn out better than currently 
expected. In this context, the timely implem entation of a medium-term budgetary framework 
would be critical for a successful and las ting consolidation of the public finances. 
Furthermore, given that the l ong-term budgetary impact of agei ng in Cyprus is significantly 
above the EU average, mainly as a result of a relatively high increase  in pension expenditure, 
measures are needed to improve the long-te rm sustainability of public finances.  
Enhanced surveillance u nder the EDP, which seems necessary in view also of the deadline for 
the correction of the excessive deficit, will  require regular and timely monitoring of the 
progress made in the implementation of the fi scal consolidation strategy to ensure the 
correction of the excessive deficit. In this c ontext, a separate chapter in the forthcoming 
updates of Cyprus’ stability programme coul d usefully be devoted to this issue. 
Comparison of key macroeconomic and budgetary projections 
    2007 2008 2009 2010 2011 2012 2013 
COM spring 2010 5.1 3.6 -1.7 -0.4 1.3 n.a. n.a. Real GDP 
(% change) SP Apr 2010 5.1 3.6 -1.7 0.5 1.5 3.0 3.2 
COM spring 20102 2.4 3.4 -0.7 -2.1 -1.6 n.a. n.a. Output gap1 
(% of potential GDP) SP Apr 20103 1.9 2.9 -1.3 -2.4 -2.5 -1.6 -0.5 
COM spring 2010 3.4 0.9 -6.1 -7.1 -7.7 n.a. n.a. General government balance 
(% of GDP) SP Apr 2010 3.4 0.9 -6.1 -6.0 -4.5 -3.4 -2.5 
COM spring 2010 6.4 3.7 -3.6 -4.4 -4.8 n.a. n.a. Primary balance 
(% of GDP) SP Apr 2010 6.4 3.7 -3.6 -3.7 -2.1 -1.0 0.1 
COM spring 2010 2.5 -0.4 -5.8 -6.3 -7.1 n.a. n.a. Cyclically-adjusted balance1 
(% of GDP) SP Apr 2010 2.6 -0.2 -5.6 -5.2 -3.6 -2.9 -2.3 
COM spring 2010 2.5 -0.4 -5.8 -6.3 -7.1 n.a. n.a. Structural balance4 
(% of GDP) SP Apr 2010 2.6 -0.2 -5.6 -5.2 -3.6 -2.9 -2.3 
COM spring 2010 58.3 48.4 56.2 62.3 67.6 n.a. n.a. Government gross debt 
(% of GDP) SP Apr 20105 58.3 48.4 56.2 61.0 63.2 63.1 62.3 
Notes : 
1 Output gaps and cyclically-adjusted ba lances from the programmes as recalculated by Commission services on the basis 
of the information in the programmes. 
2 Based on estimated potential growth of 2.0%, 2.8%, 2.8%, 2.8% and 2.8% respectively in the period 2009-2013. 
3 Based on estimated potential growth of 2.5%, 1.6%, 1.6%, 2.0% and 2.2% respectively in the period 2009-2013. 
4 Cyclically-adjusted balance excluding one- off and other temporary measures. One- off and other temporary measures are 
0.1% in years 2010, 2011 and 2012 (all deficit reducing) according to the most recent programme. There are no one-off 
and other temporary measures in the Commission services' spring 2010 forecast. 
5 For 2010, Cyprus notified a planned debt of 62% of GDP, thus exceeding 60% of GDP Treaty reference value. The 
April 2010 stability programme plans a slightly lower figure (6 1%) and foresees a further increase to 63.2% of GDP in 
2011. 
Source : 
Stability programme (SP); Commission services’ spring 2010 forecasts (COM); Commission services’ calculations. 
 
EN 6   EN Proposal for a 
COUNCIL DECISION 
on the existence of an excessive deficit in Cyprus 
THE COUNCIL OF THE EUROPEAN UNION, 
Having regard to the Treaty on the Functioning of the European Union, and in particular 
Article 126(6) thereof, 
Having regard to the proposal from the European Commission, 
Having regard to the observations made by Cyprus, Whereas: (1) According to Article 126 of the Treaty on the Functioning of the European Union 
Member States shall avoid ex cessive government deficits. 
(2) The Stability and Growth Pact is base d on the objective of sound government finances 
as a means of strengthening the conditions fo r price stability and for strong sustainable 
growth conducive to employment creation. 
(3) The excessive deficit procedure (EDP) under Article 126 of the Treaty, as clarified by 
Council Regulation (EC) No 1467/97 on  speeding up and clarifying the 
implementation of the excessive deficit procedure
4 (which is part of the Stability and 
Growth Pact), provides for a decision on the existence of an excessive deficit. The Protocol on the excessive deficit procedur e annexed to the Treaty sets out further 
provisions relating to the implementation of the EDP. Council Regulation (EC) No 
479/2009
5 lays down detailed rules and definition s for the application of the provision 
of the said Protocol.  
(4) The 2005 reform of the Stability and Growth Pact sought to strengthen its 
effectiveness and economic underpinnings as we ll as to safeguard th e sustainability of 
the public finances in the long run. It aimed at ensuring that in particular the economic 
and budgetary background was taken into account fully in all steps in the EDP. In this 
way, the Stability and Growth Pact pr ovides the framework supporting government 
policies for a prompt return to sound budge tary positions taki ng account of the 
economic situation. 
(5) Article 126(5) of the Treaty requires th e Commission to address an opinion to the 
Council if the Commission considers that an ex cessive deficit in a Member State exists 
or may occur. Having taken into account it s report in accordance with Article 126(3) 
                                                 
4 OJ L 209, 2.8.1997, p. 6.  
5 OJ L 145, 10.6.2009, p. 1. 
EN 7   EN and having regard to th e opinion of the Economic and Financial Committee in 
accordance with Article 126(4), the Commission  concluded that an excessive deficit 
exists in Cyprus. The Commission therefore addressed such an opinion to the Council 
in respect of Cyprus on 15 June 20106. 
(6) Article 126(6) of the Treaty states that the Council should consider any observations 
which the Member State concerned may wish to make before deciding, after an overall 
assessment, whether an excessive deficit exis ts. In the case of Cyprus, this overall 
assessment leads to the following conclusions. 
(7) According to data notifie d by the Cypriot authoritie s in April 2010, the general 
government deficit in Cyprus reached 6.1% of GDP in 2009, thus exceeding the 3% of 
GDP reference value. The deficit was not clos e to the 3% of GDP reference value, but 
the excess over the reference value can be qualified as exceptional within the meaning of the Treaty and the Stability and Growth P act. In particular, it results from a severe 
economic downturn in the sense of the Trea ty and the Stability and Growth Pact. 
According to the Commission services’ 2010 sp ring forecast, real GDP in Cyprus is 
projected to shrink further,  although to a lesser extent, by almost ½% in 2010 
compared with 1¾% in 2009. However, the planned excess over the reference value 
cannot be considered temporary. According to the Commission services’ spring 2010 
forecast, the budgetary deficit would reach  about 7¾% of GDP in 2011 on a no-policy 
change basis. The deficit criteri on in the Treaty is not fulfilled. 
(8) According to data notifie d by the Cypriot authoritie s in April 2010, the general 
government gross debt remains below the 60% of GDP reference value and stood at 
56.2% of GDP in 2009. For 2010, Cyprus notified a planned debt of 62% of GDP, thus 
exceeding 60% of GDP Treaty reference value. The Commission services’ spring 2010 forecast projects debt to  rise further to 62.3% of GDP in 2010 and 67.6% in 2011 
on the back of a deteriorated primary balance. In view of these trends, the debt ratio 
cannot be considered as diminishing suffici ently and approaching the reference value 
at a satisfactory pace within the meaning of the Treaty and the Stability and Growth Pact. The debt criterion in th e Treaty is not fulfilled. 
(9) According to Article 2(4)  of Council Regulation (EC) No 1467/97, “relevant factors” 
can only be taken into account in the st eps leading to the Council decision on the 
existence of an excessive deficit in acco rdance with Article 126(6) if the double 
condition - that the deficit remains close to the reference value and that its excess over 
the reference value is temporary - is fully  met. In the case of  Cyprus, this double 
condition is not met. Therefore,  relevant factors are not take n into account in the steps 
leading to this decision. 
                                                
 
6 All EDP-related documents for Cyprus can be found at the following website: 
 http://ec.europa.eu/ec onomy_finance/sgp/defic it/countries/index_en.htm. 
EN 8   EN HAS ADOPTED THIS DECISION: 
Article 1 
From an overall assessment it follows that  an excessive deficit exists in Cyprus. 
Article 2 
This decision is addressed to the Republic of Cyprus. 
Done at Brussels,  
 For the Council 
 The President