EN    EN EN 
 
EN    EN  EUROPEAN COMMISSION 
Brussels, 15.6.2010 
SEC(2010) 739 final 
  
COMMISSION OPINION 
on the existence of an excessive deficit in Cyprus 
 
EN 2   EN COMMISSION OPINION 
on the existence of an excessive deficit in Cyprus 
THE APPLICATION OF THE STABILITY AND GROWTH PACT IN THE CURRENT 
CRISIS SITUATION 
1. Many EU countries are presently facing gene ral government deficits above the 3% of 
GDP reference value set in the Treaty. The of ten strong 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 f actors are at play. First, 
the economic downturn brings about declinin g tax revenue and ri sing social benefit 
expenditure (e.g. unemployment benefits ). Second, recognising that budgetary 
policies have an important role to play  in the current extraordinary economic 
situation, the Commission called for a fiscal stimul us 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 acr oss Member States to reflect  their different positions 
in terms of public finance sustainability and competitiveness and should be reversed when economic conditions improve. Finally, several 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, although some of the costs 
of the government support could be recouped in the future. 
2. The Stability and Growth Pact requires the Commission to initiate the excessive 
deficit procedure (EDP) whenever the defi cit of a Member State exceeds the 3% of 
GDP reference value. The amendments to the Stability and Growth Pact in 2005 
aimed at ensuring that in particular  the economic and budgetary background was 
taken into account fully in al l steps in the EDP. In this way, the Stability and Growth 
Pact provides the framework supporting gover nment policies for a prompt return to 
sound budgetary positions taking account of the economic situa tion, and thereby 
ensuring long-term sustainability of public finances. 
LEGAL BACKGROUND 3. Article 126 of the Treaty on the Functioni ng 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 implementation of 
the excessive deficit procedure”
1, which is part of the Stability and Growth Pact. 
4. According to Article 126(2) of the Treaty, the Commission has to monitor 
compliance with budgetary discipline on th e basis of two criteria, namely: (a) 
whether the ratio of the planned or act ual government deficit to gross domestic 
                                                 
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 product (GDP) exceeds the reference value of 3% (unless either the ratio has 
declined substantially and continuously a nd reached a level that comes close to the 
reference value; or, alternatively, the excess over the reference value is only exceptional and temporary and the ratio remain s 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 diminishi ng and approaching the reference value at a 
satisfactory pace). 
5. Article 126(3) of the Treaty stipulates that, if a Member State does not fulfil the 
requirements under one or both of these cr iteria, the Commission has to prepare a 
report. This report also has to “take into account whether the government deficit 
exceeds government investment expenditure and take into account all other relevant factors, including the medium-term econom ic and budgetary position of the Member 
State”. 
6. On the basis of the data notified by the Cypriot authorities in March 2010
2 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. 
7. Subsequently, and in accordance with Artic le 126(4) of the Treaty, the Economic and 
Financial Committee formulated an opini on on the Commission report on [27 May 
2010]. 
8. Article 126(5) of the Treaty requires th e Commission to address an opinion to the 
Council if the Commission considers that an  excessive deficit in a Member State 
exists or may occur. In order to reach a conclusion on whether an excessive deficit 
exists or may occur, the Commission cons iders that account shoul d be taken of: (i) 
the conclusions of its report under Artic le 126(3) and (ii) the opinion of the 
Economic and Financial Committee on this re port. On the basis of these elements, 
the Commission has established a numb er of considerations for Cyprus. 
CONSIDERATIONS CONCERNING CYPRUS 9. Immediately following its accession to the EU in May 2004, an EDP for Cyprus was 
initiated by the Commission
4 with the adoption of a re port under Article 104(3) of 
Treaty Establishing the European Community (TEC) in view of a deficit of 6.3% of 
GDP in 2003, i.e. above the reference valu e of 3% of GDP. In July 2004, following 
recommendations from the Commission, the Council decided, in accordance with Article 104(6) TEC, that an excessive defi cit existed in Cyprus and addressed a 
recommendation in accordance with Article 104(7) TEC to Cyprus with a view to 
bringing the excessive deficit situation to an end as rapidly as possible and by 2005 
at the latest. In July 2006, following an overall assessment which showed that the 
                                                
 
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. 
4 Documents related to the excessive deficit procedure for Cyprus are available at:  
http://ec.europa.eu/econo my_finance/sgp/deficit/c ountries/index_en.htm  
 
EN 4   EN deficit was reduced to 2.4% of GDP in 2005, the Council decided to abrogate its 
decision on the existence of an excessi ve deficit under Article 104(12) TEC. 
10. After the end of the excessive deficit procedure, the Cypriot government balance 
remained well below the deficit threshold of  3% of GDP. In particular, in 2006 the 
deficit declined further to 1.2% of GDP, while in 2007 and 2008 the budget balance turned into a surplus of 3.4% and 0.9% of GDP respectively. In parallel, the 
structural balance turned from a deficit of  1¼% of GDP in 2006 to a surplus of 2½% 
in 2007, in excess of the medium-term budge tary objective (MTO) of Cyprus, which 
is a balanced budget in structural terms. Thereafter, the struct ural surplus of the 
previous years turn ed back into negative territo ry. During the pe riod 2006-2008, the 
general government gross debt ratio dec lined by about 16¼ pp. of GDP to 48.4% in 
2008, well below the 60% of GDP Treaty refe rence value. The debt reduction was 
driven by primary surpluses, high nom inal growth and sizeable stock-flow 
adjustments (SFA) associated with the pl anned reduction of deposits at the central 
bank (sinking funds) and other accumulated financial assets  used to repay maturing 
debt.  
11. According to data notifie d by the Cypriot authorities 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 Commissi on 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 the Treaty and the Stability and Growth Pact. In particular, it results from a severe 
economic downturn in the sense of the Tr eaty 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 exce ss over the reference value 
cannot be considered temporary. According to the Commission services’ spring 2010 
forecast, the budgetary deficit is projected  to reach about 7¾% of GDP in 2011 on a 
no-policy change basis. The deficit cr iterion in the Treaty is not fulfilled. 
12. According to data notifie d by the Cypriot authorities 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 refere nce 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 pr imary balance. In vi ew of these trends, 
the debt ratio cannot be cons idered as diminishing suffi ciently and approaching the 
reference value at a satisfactory pace with in the meaning of the Treaty and the 
Stability and Growth Pact. The debt cr iterion in the Treaty is not fulfilled. 
13. In line with the provisions  in the Treaty and the Stab ility and Growth Pact, the 
Commission also analysed in its report “rel evant factors”. According to the Stability 
and Growth Pact, these can only be taken into account in the st eps leading to the 
decision on the existence of an excessive deficit if the deficit satisfies the double 
condition of closeness and temporariness. In the case of Cyprus, the double condition 
is not met. Considered on their own merit, th e relevant factors in the current case on 
balance present a mixed picture. 
 
EN 5   EN 14. The opinion of the Economic and Financ ial Committee in accordance with Article 
126(4) of the Treaty is c onsistent with the assessmen t in the Commission report 
under Article 126(3). 
CONCLUSION 15. The monitoring of the budgetary situati on in Cyprus and, in particular, the 
examination of the compliance with the crite ria laid down in Artic le 126(2) has led 
the Commission to prepare a report in accordance with Article 126(3) of the Treaty. The Commission, having taken into account its report and the opinion of the Economic and Financial Committee, is of the opinion that an excessive deficit exists 
in Cyprus.