Commission Opinion on the existence of an excessive deficit in Cyprus
Date: 2010-06-15
Institutions: European Commission
Subjects: Cyprus, budget deficit, economic recession, public debt, public finance, stability pact

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EUROPEAN COMMISSION 

Brussels, 15.6.2010 
SEC(2010) 739 final 

COMMISSION OPINION 

on the existence of an excessive deficit in Cyprus 

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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. 

2. 

Many EU countries are presently facing general government deficits above the 3% of 
GDP reference value set in the Treaty. The often 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 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  important  role  to  play  in  the  current  extraordinary  economic 
situation,  the  Commission  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, 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. 

The  Stability  and  Growth  Pact  requires  the  Commission  to  initiate  the  excessive 
deficit procedure (EDP) whenever the deficit 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 all steps in the EDP. In this way, the Stability and Growth 
Pact provides the framework supporting government policies for a prompt return to 
sound  budgetary  positions  taking  account  of  the  economic  situation,  and  thereby 
ensuring long-term sustainability of public finances. 

LEGAL BACKGROUND 

3. 

4. 

1 

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 implementation of 
the excessive deficit procedure”1, which is part of the Stability and Growth Pact. 

According  to  Article  126(2)  of  the  Treaty,  the  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 

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 
the  ECOFIN  Council  of  10  November  2009,  available  at 
http://ec.europa.eu/economy_finance/sgp/legal_texts/index_en.htm. 

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product  (GDP)  exceeds  the  reference  value  of  3%  (unless  either  the  ratio  has 
declined substantially and continuously and 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 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 approaching the reference value at a 
satisfactory pace). 

Article  126(3)  of  the  Treaty  stipulates  that,  if  a  Member  State  does  not  fulfil  the 
requirements  under  one  or  both  of  these  criteria,  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 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) of the Treaty, the Economic and 
Financial  Committee  formulated  an  opinion  on  the  Commission  report  on  [27  May 
2010]. 

Article  126(5)  of  the  Treaty  requires  the  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 considers that account should be taken of: (i) 
the  conclusions  of  its  report  under  Article  126(3)  and  (ii)  the  opinion  of  the 
Economic  and  Financial  Committee  on  this  report.  On  the  basis  of  these  elements, 
the Commission has established a number of considerations for Cyprus. 

5. 

6. 

7. 

8. 

CONSIDERATIONS CONCERNING CYPRUS 

9. 

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Immediately following its accession to the EU in May 2004, an EDP for Cyprus was 
initiated  by  the  Commission4  with  the  adoption  of  a  report  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 value 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  deficit  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 

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/portal/government_finance_statistics/excessive_deficit/edp_
notification_tables. 
All EDP-related documents for Cyprus can be found at the following website: 
http://ec.europa.eu/economy_finance/sgp/deficit/countries/index_en.htm. 
Documents related to the excessive deficit procedure for Cyprus are available at: 
http://ec.europa.eu/economy_finance/sgp/deficit/countries/index_en.htm  

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10. 

11. 

12. 

13. 

deficit  was  reduced  to  2.4%  of  GDP  in  2005,  the  Council  decided  to  abrogate  its 
decision on the existence of an excessive deficit under Article 104(12) TEC. 

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 budgetary objective (MTO) of Cyprus, which 
is  a  balanced  budget  in  structural  terms.  Thereafter,  the  structural  surplus  of  the 
previous years turned back into negative territory. During the period 2006-2008, the 
general government gross debt ratio declined by about 16¼ pp. of GDP to 48.4% in 
2008,  well  below  the  60%  of  GDP  Treaty  reference  value.  The  debt  reduction  was 
driven  by  primary  surpluses,  high  nominal  growth  and  sizeable  stock-flow 
adjustments  (SFA)  associated  with  the  planned  reduction  of  deposits  at  the  central 
bank (sinking funds) and other accumulated financial assets used to repay maturing 
debt.  

According  to  data  notified  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  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  the 
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. 
According 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 about 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  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  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  account  in  the  steps  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, the relevant factors in the current case on 
balance present a mixed picture. 

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14. 

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). 

CONCLUSION 

15. 

The  monitoring  of  the  budgetary  situation  in  Cyprus  and,  in  particular,  the 
examination of the compliance with the criteria laid down in Article 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. 

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