Recommendation for a COUNCIL RECOMMENDATION on the economic, social, employment, structural and budgetary policies of Cyprus
Date: 2025-06-04
Institutions: European Commission, Reform and Investment Task Force
Subjects: Cyprus, budget policy, economic policy, economic recovery, economic reform, employment policy, energy policy, labour market, social policy, stability pact

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   EUROPEAN COMMISSION  Brussels, 4.6.2025  COM(2025) 213 final  Recommendation for a COUNCIL RECOMMENDATION on the economic, social, employment, structural and budgetary policies of Cyprus {SWD(2025) 213 final}  
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the economic, social, employment, structural and budgetary policies of Cyprus 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 121(2) and Article 148(4) thereof, 

Having regard to Regulation (EU) 2024/1263 of the European Parliament and of the Council 
of  29  April  2024  on  the  effective  coordination  of  economic  policies  and  on  multilateral 
budgetary surveillance and repealing Council Regulation (EC) No 1466/971, and in particular 
Article 3(3) thereof, 

Having  regard  to  Regulation  (EU)  No  1176/2011  of  the  European  Parliament  and  of  the 
Council  of  16 November 2011  on  the  prevention  and  correction  of  macroeconomic 
imbalances2, and in particular Article 6(1) thereof, 

Having regard to the recommendation of the European Commission, 

Having regard to the resolutions of the European Parliament, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

Having regard to the opinion of the Economic and Financial Committee, 

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

General considerations 

(1) 

Regulation (EU) 2024/1263, which entered into force on 30 April 2024, specifies the 
objectives  of  the  economic  governance  framework,  which  aims  at  promoting  sound 
and  sustainable  public  finances  and  sustainable  and  inclusive  growth  and  resilience 
through reforms and investments, and preventing excessive government deficits. The 
Regulation  stipulates  that  the  Council  and  the  Commission  conduct  multilateral 
surveillance in the context of the European Semester in accordance with the objectives 
and requirements set out in the TFEU. The European Semester includes, in particular, 

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2 

OJ L, 2024/1263, 30.4.2024, ELI: http://data.europa.eu/eli/reg/2024/1263/oj. 
OJ L 306, 23.11.2011, p. 25, ELI: http://data.europa.eu/eli/reg/2011/1176/oj. 

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the  formulation,  and  the  surveillance  of  the  implementation  of  country-specific 
recommendations.  The  Regulation  also  promotes  national  ownership  of  fiscal  policy 
and  emphasises  its  medium-term  focus,  combined  with  more  effective  and  coherent 
enforcement. Each Member State must submit to  the Council and the Commission  a 
national  medium-term  fiscal-structural  plan,  containing  its  fiscal,  reform  and 
investment  commitments,  over  4  or  5  years,  depending  on  the  length  of the  national 
legislative  term.  The  net  expenditure3  path  in  these  plans  has  to  comply  with  the 
Regulation’s  requirements,  including  the  requirements  to  put  or  keep  general 
government debt on a plausibly downward path by the end of the adjustment period, or 
for it to remain at prudent levels below 60% of gross domestic product (GDP), and to 
bring  and/or  maintain  the  general  government  deficit  below  the  3%-of-GDP  Treaty 
reference value over the medium term. Where a Member State commits to a relevant 
set  of  reforms  and  investments  in  accordance  with  the  criteria  set  out  in  the 
Regulation, the adjustment period may be extended by up to three years. 
Regulation  (EU)  2021/241  of  the  European  Parliament  and  of  the  Council4,  which 
established  the  Recovery  and  Resilience  Facility  (the  ‘RRF’),  entered  into  force  on 
19 February 2021.  The  RRF  provides  financial  support  to  Member  States  for 
implementing  reforms  and  investments,  delivering  a  fiscal  impulse  financed  by  the 
Union.  In  line  with  the  priorities  of  the  European  Semester  for  economic  policy 
coordination, the RRF fosters economic and social recovery while driving sustainable 
reforms and investments, in particular promoting the green and digital transitions and 
making  Member  States’  economies  more  resilient.  It  also  helps  strengthen  public 
finances  and  boost  growth  and  job  creation  in  the  medium  and  long  term,  improve 
territorial cohesion within the Union and support the continued implementation of the 
European Pillar of Social Rights. 
Regulation  (EU)  2023/435  of  the  European  Parliament  and  of  the  Council5  (the 
‘REPowerEU  Regulation’),  which  was  adopted  on  27 February 2023,  aims  to  phase 
out the Union’s dependence on Russian fossil-fuel imports. This helps achieve energy 
security  and  diversify  the  Union’s  energy  supply,  while  increasing  the  uptake  of 
renewables,  energy  storage  capacities  and  energy  efficiency.  Cyprus  added  a  new 
REPowerEU chapter to its national recovery and resilience plan in order to finance key 
reforms and investments that will help achieve the REPowerEU objectives. 

On  17  May  2021,  Cyprus  submitted  its  national  recovery  and  resilience  plan  to  the 
Commission, in accordance with Article 18(1) of Regulation (EU) 2021/241. Pursuant 
to Article 19 of that Regulation, the Commission assessed the relevance, effectiveness, 
efficiency  and  coherence  of  the  recovery  and  resilience  plan,  in  accordance  with  the 

Net  expenditure  as  defined  in  Article  2,  point  (2),  of  Regulation  (EU)  2024/1263:  ‘net  expenditure’ 
means government expenditure net of (i) interest expenditure; (ii) discretionary revenue measures; (iii) 
expenditure  on  programmes  of  the  Union  fully  matched  by  revenue  from  Union  funds;  (iv)  national 
expenditure  on  co-financing  of  programmes  funded  by  the  Union;  (v)  cyclical  elements  of 
unemployment benefit expenditure; and (vi) one-offs and other temporary measures. 
Regulation  (EU)  2021/241  of  the  European  Parliament  and  of  the  Council  of  12 February 2021 
(OJ  L  57,  18.2.2021,  p.  17,  ELI: 
establishing 
http://data.europa.eu/eli/reg/2021/241/oj). 
Regulation  (EU)  2023/435  of  the  European  Parliament  and  of  the  Council  of  27 February 2023 
amending Regulation (EU) 2021/241 as regards REPowerEU chapters in recovery and resilience plans 
and  amending  Regulations  (EU)  No  1303/2013,  (EU)  2021/1060  and  (EU)  2021/1755,  and  Directive 
2003/87/EC (OJ L 63, 28.2.2023, p. 1, ELI: http://data.europa. eu/eli/reg/2023/435/oj). 

the  Recovery  and  Resilience  Facility 

(2) 

(3) 

(4) 

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(5) 

(6) 

(7) 

assessment guidelines set  out  in Annex V. On 20 July  2021, the Council adopted its 
Implementing Decision approving the assessment of the recovery and resilience plan 
for Cyprus6, which was amended under Article 18(2) on 8 December 2023 to update 
the maximum financial contribution for non-repayable financial support, as well as to 
include  the  REPowerEU  chapter7.  The  release  of  instalments  is  conditional  on  the 
adoption  of  a  decision  by  the  Commission,  in  accordance  with  Article  24(5),  stating 
that  Cyprus  has  satisfactorily  achieved  the  relevant  milestones  and  targets  set  out  in 
the  Council  Implementing  Decision.  Satisfactory  achievement  requires  that  the 
achievement  of  preceding  milestones  and  targets  for  the  same  reform  or  investment 
has not been reversed. 

On  21  January  2025,  the  Council,  upon  the  recommendation  of  the  Commission, 
adopted a recommendation endorsing the national medium-term fiscal-structural plan 
of Cyprus8. The plan was  submitted in  accordance with  Article 11 and Article 36(1), 
point (a), of Regulation (EU) 2024/1263, covers the period from 2025 until 2028 and 
presents a fiscal adjustment spread over four years.  

On  26 November 2024,  the  Commission  adopted  an  opinion  on  the  2025  draft 
budgetary  plan  of  Cyprus.  On  the  same  date,  on  the  basis  of  Regulation  (EU)  No 
1176/2011,  the  Commission  adopted  the  2025  Alert  Mechanism  Report,  in  which  it 
identified Cyprus as one of the Member States for which an in-depth review would be 
needed.  The  Commission  also  adopted  a 
for  a  Council 
recommendation on the economic policy of the euro area and a proposal for the 2025 
Joint  Employment  Report,  which  analyses  the  implementation  of  the  Employment 
Guidelines  and  the  principles  of  the  European  Pillar  of  Social  Rights.  The  Council 
adopted  the  Recommendation  on  the  economic  policy  of  the  euro  area9  on  13  May 
2025 and the Joint Employment Report on 10 March 2025.  

recommendation 

On  29 January 2025,  the  Commission  published  the  Competitiveness  Compass,  a 
strategic framework that aims to boost the EU’s global competitiveness over the next 
five  years.  It  identifies  the  three  transformative  imperatives  of  sustainable  economic 
growth: (i) innovation; (ii) decarbonisation and competitiveness; and (iii) security. To 
close  the  innovation  gap,  the  EU  aims  to  foster  industrial  innovation,  support  the 
growth of start-ups through initiatives like the EU Start-up and Scale-up Strategy, and 
promote the adoption of advanced technologies like artificial intelligence and quantum 
computing.  In  pursuit  of  a  greener  economy,  the  Commission  has  outlined  a 
comprehensive Affordable Energy Action Plan and a Clean Industrial Deal, ensuring 
that  the  shift  to  clean  energy  remains  cost-effective,  competitiveness-friendly, 
particularly  for  energy-intensive  sectors,  and  is  a  driver  for  growth.  To  reduce 
excessive dependencies and increase security, the Union is committed to strengthening 
global  trade  partnerships,  diversifying  supply  chains  and  securing  access  to  critical 
raw materials and clean energy sources. These priorities are underpinned by horizontal 
enablers, namely regulatory simplification, deepening of the single market, financing 

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Council Implementing Decision of 20 July 2021 on the approval of the assessment of the recovery and 
resilience plan for Cyprus (10686/2021). 
Council Implementing Decision of 8 December 2023 amending the Implementing Decision of 20 July 
2021 on the approval of the assessment of the recovery and resilience plan for Cyprus (15571/2024). 
Council  Recommendation  of  21  January  2025  endorsing  the  medium-term  fiscal-structural  plan  of 
Cyprus, OJ C/2025/10/2. 
Council  Recommendation  of  13  May  2025  on  the  economic  policy  of  the  euro  area  (OJ  C, 
C/2025/2782, 13.05.2025, ELI: http:// data.europa.eu/eli/C/2025/2782/oj).)  

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(8) 

competitiveness and a Savings and Investments Union, promotion of skills and quality 
jobs, and better coordination of EU policies. The Competitiveness Compass is aligned 
with  the  European  Semester,  ensuring  that  Member  States’  economic  policies  are 
consistent with the Commission’s strategic objectives, creating a unified approach to 
economic governance that fosters sustainable growth, innovation and resilience across 
the Union. 

In  2025,  the  European  Semester  for  economic  policy  coordination  continues  to 
develop  alongside  the  implementation  of  the  RRF.  The  full  implementation  of  the 
recovery and resilience plans remains essential for delivering on the policy priorities 
under the European Semester, as the plans help effectively address all or a significant 
subset  of  challenges  identified  in  the  relevant  country-specific  recommendations 
issued in recent years. The country-specific recommendations remain equally relevant 
for  the  assessment  of  amended  recovery  and  resilience  plans  in  accordance  with 
Article 21 of Regulation (EU) 2021/241.   

(9) 

The  2025  country-specific  recommendations  cover  the  key  economic  policy 
challenges that are not sufficiently addressed by measures included in the recovery and 
resilience  plans,  taking  into  account  the  relevant  challenges  identified  in  the  2019-
2024 country-specific recommendations. 

in 

(10)  On  4  June  2025,  the  Commission  published  the  2025  country  report  for  Cyprus.  It 
assessed  Cyprus’s  progress 
country-specific 
recommendations  and  took  stock  of  Cyprus’s  implementation  of  the  recovery  and 
resilience plan. Based on this analysis, the country report identified the most pressing 
challenges  Cyprus  is  facing.  It  also  assessed  Cyprus’s  progress  in  implementing  the 
European  Pillar  of  Social  Rights  and  in  achieving  the  Union  headline  targets  on 
employment, skills and poverty reduction, as well as progress in achieving the United 
Nations Sustainable Development Goals.  

addressing 

relevant 

the 

(11)  The  Commission  carried  out  an  in-depth  review  under  Article  5  of  Regulation  (EU) 
No  1176/2011  for  Cyprus.  The  main  findings  of  the  Commission’s  assessment  of 
macroeconomic  vulnerabilities  for  Cyprus  for  the  purposes  of  that  Regulation  were 
published on 13 May 202510. On 4 June 2025, the Commission concluded that Cyprus 
is  no  longer  experiencing  macroeconomic  imbalances.  In  particular,  vulnerabilities 
relating  to  external  and  private  debt  are  receding,  in  part  on  account  of  strong 
economic  growth,  and  government  debt  reduction  is  further  supported  by  continued 
budgetary  surpluses;  the  current  account  deficit  remains  sizeable.  Cyprus  has  made 
important  progress  in  implementing  measures  that  address  its  vulnerabilities. 
Household  and  non-financial  corporate  debt  have  been  falling  as  a  share  of  GDP, 
predominantly thanks to strong denominator effects on account of high nominal GDP 
growth.  A  large  share  of  corporate  debt  is  owed  by  special  purpose  entities,  whose 
lenders  are  located  outside  of  Cyprus,  and  which  pose  limited  risks  to  the  economy. 
Additionally, non-performing loans held by banks has been declining significantly due 
to  sales,  write  offs  and  repayments.  Non-performing  loans  held  by  credit-acquiring 
companies are also decreasing leading to further deleveraging. The government debt is 
decreasing at a fast pace and Cyprus is forecast to sustain budgetary surpluses. Despite 
declining  in  2024,  the  current  account  deficit  remains  elevated  and  is  expected  to 
improve  only  marginally;  the  negative  net  international  investment  position  remains 

10 

SWD(2025) 68 final. 

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sizeable  but  is  significantly  inflated  due  to  the  presence  of  special  purpose  entities 
without  significant  direct  links  to  the  domestic  economy.  Cyprus  is  making  policy 
progress to address its vulnerabilities. In particular, the foreclosure framework became 
fully operational in 2024, and legislation aiming to facilitate the non-performing loans 
resolution is expected to ease household indebtedness and boost their savings.  

Assessment of the Annual Progress Report 

(12)  On 21 January 2025 the Council recommended the following maximum growth rates 
of net expenditure for Cyprus: 6.0% in 2025, 5.0% in 2026, 5.4% in 2027, and 4.3% in 
2028,  which  correspond  to  the  maximum  cumulative  growth  rates  calculated  by 
reference to 2023 of 8.9% in 2025, 14.3% in 2026, 20.5% in 2027, and 25.7% in 2028. 
On 30 April 2025 Cyprus submitted its Annual Progress Report11, on adherence to the 
recommended  maximum  growth  rates  of  net  expenditure  and  the  implementation  of 
reforms and investments responding to the main challenges identified in the European 
Semester country-specific recommendations. The Annual Progress Report also reflects 
Cyprus’s  biannual  reporting  on  the  progress  made  in  achieving  its  recovery  and 
resilience plan in accordance with Article 27 of Regulation (EU) 2021/241. 

(13)  Russia’s  war  of  aggression  against  Ukraine  and  its  repercussions  constitute  an 
existential  challenge  for  the  European  Union.  The  Commission  recommended  to 
activate the national  escape clause of the Stability and Growth Pact  in  a coordinated 
manner to support the EU efforts to achieve a rapid and significant increase in defence 
spending and this proposal was welcomed by the European Council of 6 March 2025. 

(14)  Based on data validated by Eurostat 12, Cyprus’s general government surplus increased 
from 1.7% of GDP in 2023 to 4.3% in 2024, while the general government debt fell 
from 73.6% of GDP at the end of 2023 to 65.0% at the end of 2024. According to the 
Commission’s  calculations,  these  developments  correspond  to  a  net  expenditure 
growth rate of 2.9% in 2024. In the Annual Progress Report, Cyprus estimates the net 
expenditure  growth  in  2024  at  3.2%.  The  Commission  estimates  that  the  net 
expenditure  growth  was  lower  than  in  the  Annual  Progress  Report.  The  difference 
between the Commission’s calculations and the estimates of national authorities is due 
to lower total expenditure and higher deductions for the national  co-financing of EU 
programmes,  reflecting  more  recent  available  data13.  Based  on  the  Commission’s 
estimates,  the  fiscal  stance14,  which  includes  both  nationally  and  EU  financed 
expenditure, was contractionary, by 1.9% of GDP, in 2024. 

(15)  According to the Annual Progress Report, the macroeconomic scenario underpinning 
the budgetary projections by Cyprus  expects  real  GDP growth at  3.1% in  both  2025 

11 

12 

13 

14 

The  2025  Annual  Progress  Reports  are  available  on:  https://economy-finance.ec.europa.eu/economic-
and-fiscal-governance/stability-and-growth-pact/preventive-arm/annual-progress-reports_en 

Eurostat-Euro Indicators, 22.4.2025. 

The  Commission  figures  for  2024  are  based  on  outturn  data  in  line  with  the  April  2025  fiscal 
notification, while national authorities rely on earlier data. 

The fiscal stance is defined as a measure of the annual change in the underlying budgetary position of 
the  general  government.  It  aims  to  assess  the  economic  impulse  stemming  from  fiscal  policies,  both 
those  that  are  nationally  financed  and  those  that  are  financed  by  the  EU  budget.  The  fiscal  stance  is 
measured as the difference between (i) the medium-term potential growth and (ii) the change in primary 
expenditure net of discretionary revenue measures and including expenditure financed by non-repayable 
support (grants) from the Recovery and Resilience Facility and other Union funds. 

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and 2026, while HICP inflation is  projected at  1.9% in  2025 and 2.1% in 2026. The 
Commission  Spring  2025  Forecast  projects  real  GDP  to  grow  by  3.0%  in  2025  and 
2.5% in 2026, and HICP inflation to stand at 2.0% in both 2025 and 2026. 

In the Annual Progress Report, the general government surplus is expected to decrease 
to  3.5%  of  GDP  in  2025,  while  the  general  government  debt-to-GDP  ratio  is  set  to 
decrease  to  57.4%  by  the  end  of  2025.  These  developments  correspond  to  net 
expenditure growth of 6.8% in 2025. The Commission Spring 2025 Forecast projects a 
government  surplus  of  3.5%  of  GDP  in  2025.  According  to  the  Commission’s 
calculations,  these  developments  correspond  to  net  expenditure  growth  of  7.3%  in 
2025. These higher projections of net expenditure growth than in the Annual Progress 
Report  are  due  to  the  Commission  expecting  a  slightly  stronger  increase  of  net 
expenditure  growth  in  2025,  although  starting  from  a  lower  base.  Based  on  the 
Commission’s  estimates,  the  fiscal  stance,  which  includes  both  nationally  and  EU 
financed expenditure, is projected to be expansionary, by 1.1% of GDP, in 2025. The 
general government debt-to-GDP ratio is set to decrease to 58.0% by the end of 2025. 
The  decrease  of  the  debt-to-GDP  ratio  in  2025  mainly  reflects  the  high  government 
surplus together with solid economic growth. 

(17)  General  government  expenditure  amounting  to  1.1%  of  GDP  is  expected  to  be 
financed  by  non-repayable  support  (“grants”)  from  the  Recovery  and  Resilience 
Facility  in  2025,  compared  to  0.4%  of  GDP  in  2024,  according  to  the  Commission 
Spring 2025 Forecast. Expenditure financed by Recovery and Resilience Facility non-
repayable support enables high-quality investment and productivity-enhancing reforms 
without a direct impact on the general government balance and debt of Cyprus.  

(18)  General  government  defence  expenditure  in  Cyprus  amounted  to  1.7%  of  GDP  in 
2021,  1.5%  of  GDP  in  2022  and  1.9%  of  GDP  in  2023  15.  According  to  the 
Commission  Spring  2025  Forecast,  expenditure  on  defence  is  projected  at  1.4%  of 
GDP in both 2024 and 2025. This corresponds to a decrease of 0.3 percentage points 
of GDP compared to 2021. 

(19)  According  to  the  Commission  Spring  2025  Forecast,  net  expenditure  in  Cyprus  is 
projected to grow by 7.3% in 2025 and 10.4% cumulatively in 2024 and 2025. Based 
on  the  Commission  Spring  2025  Forecast,  the  net  expenditure  growth  of  Cyprus  in 
2025 is projected to be above the recommended maximum growth rate, corresponding 
to  a  deviation16  of  0.5%  of  GDP  in  annual  terms.  When  considering  2024  and  2025 
together, the cumulative growth rate of net  expenditure is also projected to be above 
the  recommended  maximum  growth  rate,  corresponding  to  a  deviation  of  0.5%  of 
GDP.  The  projected  deviation  exceeds  the  0.3%  of  GDP  threshold  for  the  annual 
deviation but does not exceed the 0.6% of GDP threshold for the cumulative deviation. 
Overall, this means there is a risk of deviation from the recommended maximum net 
expenditure growth, when outturn data for 2025 will be available next spring. 

(20) 

In the Annual Progress Report, the general government surplus is projected to increase 
to 3.7% of GDP in 2026, while the general government debt-to-GDP ratio is projected 
to decrease to 52.6% by the end of 2026. After 2026, in the Annual Progress Report, 

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16 

Eurostat, government expenditure by classification of functions of government (COFOG).  

From  2026  these  figures  will  appear  in  the  control  account  that  is  established  in  Article  22  of  the 
Regulation (EU) 2024/1263. 

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the  general  government  surplus  is  projected  to  remain  at  3.7%  of  GDP  in  2027  and 
2028.  In  turn,  after  2026,  the  general  government  debt-to-GDP  ratio  is  projected  to 
decrease to 48.4% in 2027, and to 43.3% in 2028. Based on policy measures known at 
the  cut-off  date  of  the  forecast,  the  Commission  Spring  2025  Forecast  projects  a 
general government surplus of 3.4% of GDP in 2026. These developments correspond 
to net expenditure growth of 5.4% in 2026. Based on the Commission’s estimates, the 
fiscal stance, which includes both nationally and EU financed expenditure, is projected 
to be contractionary, by 0.6% of GDP, in 2026. The general government debt-to-GDP 
ratio  is  projected  by  the  Commission  to  decrease  to  51.9%  by  the  end  of  2026.  The 
decrease of the debt-to-GDP ratio in 2026 mainly reflects the high government surplus 
together with solid economic growth. 

Key policy challenges 

In accordance with Article 19(3), point (b), of Regulation (EU) 2021/241 and criterion 
2.2  of  Annex  V  to  that  Regulation,  the  recovery  and  resilience  plan  includes  an 
extensive set  of mutually reinforcing  reforms and investments  to  be implemented by 
2026.  These  are  expected  to  help  effectively  address  all  or  a  significant  subset  of 
challenges  identified  in  the  relevant  country-specific  recommendations.  Within  this 
tight timeframe, finalising the effective implementation of the recovery and resilience 
plan  including  the  REPowerEU  chapter,  is  essential  to  boost  Cyprus’s  long-term 
competitiveness  through  the  green  and  digital  transitions,  while  ensuring  social 
fairness. To deliver on the commitments of the recovery and resilience plan by August 
2026,  it  is  essential  for  Cyprus  to  accelerate  the  implementation  of  reforms  and 
its 
investments  by  addressing 
administrative capacity to effectively oversee the implementation of the recovery and 
resilience plan,  expedite investment  execution, and sustain  progress  in  implementing 
key  reforms.  The  systematic  involvement  of  local  and  regional  authorities,  social 
partners,  civil  society  and  other  relevant  stakeholders  remains  essential  in  order  to 
ensure  broad  ownership  for  the  successful  implementation  of  the  recovery  and 
resilience plan. 

relevant  challenges.  Cyprus  should 

increase 

(22)  The  implementation  of  the  cohesion  policy  programme,  which  encompasses  support 
from  the  European  Regional  Development  Fund  (ERDF),  the  Just  Transition  Fund 
(JTF),  the  European  Social  Fund  Plus  (ESF+)  and  the  Cohesion  Fund  (CF),  has 
accelerated  in  Cyprus.  It  is  important  to  continue  efforts  to  ensure  the  swift 
implementation  of  this  programme,  while  maximising  its  impact  on  the  ground. 
Cyprus  is  already  taking  action  under  its  cohesion  policy  programme  to  boost 
competitiveness  and  growth.  At  the  same  time,  Cyprus  continues  to  face  challenges, 
including rising temperatures and drought risks, which are placing increased strain on 
water  supply  and  critical  infrastructure,  as  well  as  labour  shortages  and  skills 
mismatches. In accordance with Article 18 of Regulation (EU) 2021/1060, Cyprus is 
required – as part of the mid-term review of the cohesion policy funds – to review its 
programme  taking  into  account,  among  other  things,  the  challenges  identified  in  the 
2024 CSRs. The Commission proposals adopted on 1 April 202517 extend the deadline 
for submitting an assessment of the outcome of the mid-term review beyond 31 March 
2025.  It  also  provides  flexibilities  to  help  speed  up  programme  implementation  and 

17 

Proposal  for  a  REGULATION  OF  THE  EUROPEAN  PARLIAMENT  AND  OF  THE  COUNCIL 
amending  Regulations  (EU)  2021/1058  and  (EU)  2021/1056  as  regards  specific  measures  to  address 
strategic challenges in the context of the mid-term review – COM (2025) 123 final. 

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incentives  for  Member  States  to  allocate  cohesion  policy  resources  to  five  strategic 
priority areas of the Union, namely competitiveness in strategic technologies, defence, 
housing, water resilience and energy transition. 

(23)  The  Strategic  Technologies  for  Europe  Platform  (STEP)  provides  the  opportunity  to 
invest in a key EU strategic priority by strengthening the EU’s competitiveness. STEP 
is channelled through 11 existing EU funds. Member States can also contribute to the 
InvestEU programme supporting investments in priority areas. Cyprus could use these 
initiatives  to  support  the  development  or  manufacturing  of  critical  technologies, 
including clean and resource-efficient technologies. 

(24)  Beyond the economic and social challenges addressed by the recovery and resilience 
plan and other EU funds, Cyprus faces several additional challenges related to research 
and  innovation,  access  to  finance,  business  environment,  energy  transition,  climate 
change adaptation, skills mismatches and labour shortages.  

(25)  Public and private R&D investment  in  Cyprus remains  among  the lowest  in  the EU, 
with public R&D intensity stagnating at 0.29% of GDP in 2023 (EU average: 0.72%) 
and business R&D dropping to 0.28% – five times below the EU average. This stems 
from  structural  factors  such  as  a  service-based  economy,  a  limited  number  of  large 
businesses,  an  underdeveloped  private  equity  market  and  a  small  budget  for 
low  funding,  Cyprus  has  strong  scientific  output,  but 
incentives.  Despite 
commercialisation  is  weak,  with  only  0.7  patent  applications  per  EUR 1 billion  of 
GDP in 2022 (EU average: 3.2). The innovation ecosystem is fragmented, with poor 
linkages  between  universities,  start-ups,  government,  and  the  financial  sector.  The 
number  of  science,  technology,  engineering  and  mathematics  (STEM)  graduates  is 
declining,  and  researcher  density  remains  low.  The  current  research  and  innovation 
strategy lacks targets and indicators, a monitoring and evaluation mechanism, impact 
assessments,  and  long-term  funding,  and  there  is  a  need  to  improve  the  legal 
framework for commercialisation and high-risk venture capital.   

(26)  A  well-functioning  and  diversified  financial  system  is  essential  to  boost  investment, 
innovation,  and  economic  resilience.  In  Cyprus,  access  to  alternative  saving  and 
investment  instruments  remains  limited,  and  capital  markets  are  insufficiently 
developed.  The  banking  sector 
is  robust,  but  non-bank  financing  remains 
underutilised, and households’ reliance on traditional bank deposits persists, hindering 
the flow of capital into more productive investments. Financial literacy levels are still 
low compared to  the EU average, constraining households’ ability and motivation  to 
engage  in  diversified  investment  strategies.  Furthermore,  the  limited  presence  of 
institutional investors and venture capital hampers the funding opportunities available 
to innovative firms and start-ups.  

(27)  As  set  in  the  Competitiveness  Compass,  all  the  EU,  national,  and  local  institutions 
must  make  a  major  effort  to  produce  simpler  rules  and  to  accelerate  the  speed  of 
administrative  procedures.  The  Commission  has  set  ambitious  goals  for  reducing 
administrative burden: by at least 25% and by at least 35% for SMEs; and has created 
new  tools  to  achieve  these  goals,  including  systematic  stress  test  of  the  stock  of  EU 
legislation and enhanced stakeholders’ dialogue. To match this ambition, Cyprus also 
needs  to  take  action.  68%  of  businesses  consider  the  complexity  of  administrative 
procedures  to  be  a  problem  for  their  company  when  doing  business  in  Cyprus18.  A 

18 

‘Businesses' attitudes towards corruption in the EU’ Flash Report, Eurobarometer Report (April 2024).    

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business-friendly regulatory environment  is essential  to  boost investment,  innovation 
its  business 
and  entrepreneurship.  Cyprus  has  made  progress 
environment,  including  reforms  to  simplify  business  registration  and  a  reduction  in 
late payments in business-to-business and government-to-business transactions. At the 
same  time,  regulatory  and  administrative  barriers  remain  significant.  Complex 
licensing and permitting procedures, high tax compliance costs for small to medium-
sized  enterprises,  and  barriers  to  competition  in  retail  and  professional  services 
continue to weigh on business dynamism. 

improving 

in 

(28)  The  governance  of  state-owned  enterprises  (SOEs)  continues  to  fall  short  of 
international  standards,  with  shortcomings  in  areas  such  as  ownership  policies  and 
financial  transparency.  Cyprus  has  recently  set  up  an  Advisory  Council  for  the 
nomination  of  SOEs  board  members  and  has  adopted  measures  to  improve  financial 
oversight.  Nevertheless,  the  absence  of  mandatory  reporting  obligations  and  a 
comprehensive  inventory  of  public  entities  hinders  effective  monitoring.  This  also 
leads to concerns related to governance, accountability and the quality and pricing of 
services in sectors predominantly controlled by SOEs, such as the electricity sector. To 
address  these  challenges,  it  is  essential  to  create  a  regularly  updated  inventory  of 
public  entities  and  adopt  a  coordinated  reform  approach  involving  all  stakeholders. 
This should include the development of a clear SOE ownership policy that defines the 
roles, responsibilities and accountability of institutions overseeing SOEs.  

(29)  Cyprus  has  continued  to  advance  its  energy  transition,  in  particular  by  increasing  its 
renewable energy production. However, oil and petroleum products still account for a 
major  part  of  energy  consumption  and  the  country  needs  to  further  accelerate  the 
phase-out  of  fossil  fuels  across  all  sectors.  This  continued  fossil  fuel  use  poses  a 
significant  challenge  to  reducing  overall  GHG  emissions  and  to  meeting  Cyprus’s 
2030 target under the Effort Sharing Regulation. Energy isolation persists and needs to 
be overcome by expediting the Great Sea Interconnector project, which has been beset 
by delays. It is necessary to expand and upgrade Cyprus’s electricity system and grid 
and particularly energy storage systems for renewable energy. Developing renewable 
energy  storage  systems  is  vital  for  increasing  renewable  energy  capacity  in  the 
transmission network and for reducing energy curtailment. Sustainable and affordable 
transport remains a priority, as Cyprus’s transport sector faces rising energy use, full 
reliance  on  road  freight,  and  limited  incentives  and  infrastructure  for  fleet 
electrification. The country’s high dependence on energy imports exacerbates external 
sector vulnerabilities. A  deeper integration of renewables into the energy  mix would 
strengthen  the  economy’s  resilience  to  external  energy  shocks  and  make  the  country 
more attractive for productive foreign investment. Cyprus needs to scale up its efforts 
in  leveraging  private  financing  for  energy  efficiency  improvements  and  renovations, 
especially  of  worst-performing  buildings  exposing  vulnerable  consumers  to  energy 
poverty,  among  others,  by  encouraging  its  financial  institutions  to  participate  in  the 
European Energy Efficiency Financing Coalition. 

(30)  Energy  poverty  and  affordable  electricity  is  a  pressing  issue  in  Cyprus  even  though 
targeted  support  measures  have  been  implemented.  Cyprus  is  among  the  countries 
with the highest household electricity prices in the EU, placing in particular vulnerable 
consumers  under  considerable  financial  pressure.  Both  arrears  on  utility  bills  and 
structural problems like leaks and damp are still widespread. High cooling costs also 
place a significant burden on households.   

(31)  Cyprus 

is  confronted  with  significant  environmental  challenges,  particularly 
concerning water scarcity and waste management. In 2022, water exploitation reached 

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a  critical  level,  reflecting  severe  overuse  of  renewable  water  resources.  Agriculture, 
consuming 88% of the nation’s water, worsens the issue with outdated irrigation and 
limited use of water-saving technologies. Cyprus faces a significant shortfall in water 
infrastructure  investment,  with  major  needs  in  drinking  water  and  waste  water 
treatment. Despite efforts through the 2021-2027 Circular Economy Action Plan and 
the  recovery  and  resilience  plan,  the  circular  material  use  rate  and  resource 
productivity  are  still  below  the  EU  average.  In  2022,  Cyprus  recycled  just  15%  of 
municipal  and  70%  of  packaging  waste,  while  generating  the  most  food  waste  per 
person  in  the  EU  and  above-average  volumes  of  municipal  waste.  A  landfill  charge 
under  the  recovery  and  resilience  plan  could  improve  waste  management  if  properly 
enforced.  

(32)  Cyprus  is  increasingly  vulnerable  to  climate  risks,  including  wildfires,  irregular 
rainfall,  droughts  and  storms.  Despite  planned  investments,  Cyprus’s  resources  for 
climate  adaptation  fall  short  compared  to  EU  averages.  The  national  adaptation 
strategy  aims  to  increase  resilience,  focusing  on  sustainable  water  management  and 
coastal  protection,  but  the  approach  remains  largely  non-binding.  Strengthening 
governance  and  boosting  cooperation  among  ministries  and  local  authorities  are 
critical steps to effectively implement climate adaptation measures and for Cyprus to 
improve its climate resilience and align more closely with EU standards. 

(33)  Cyprus’s  employment  performance  has  been  strong,  but  labour  and  skills  shortages 
increasingly  constrain  economic  development.  Key  sectors  such  as  construction, 
energy, healthcare, agriculture and hospitality face acute shortages, which are further 
exacerbated  by  skills  mismatches  and  an  underutilised  workforce.  Additionally,  the 
share of young people not in employment, education or training (12.9%) is still higher 
than the EU average, especially for young women. Cyprus is also facing a significant 
decline in basic skills attainment among young people – marked by the largest rise in 
underachievement in the EU since 2018 – due to factors such as limited participation 
in  early  childhood  education,  incomplete  policy  implementation,  and  low  school 
autonomy. This  poses a major barrier to  reskilling efforts. Participation  in  secondary 
vocational  education  and  training  (VET)  remains  limited,  while  work-based  learning 
opportunities  and  alignment  with  labour  market  needs  are  insufficient.  The  share  of 
students  enrolled  in  STEM  fields  is  the  lowest  in  the  EU,  contributing  to  persistent 
shortages  in  critical  areas  for  the  green  and  digital  transitions.  Furthermore,  digital 
skills among the working-age population are still low, particularly among vulnerable 
groups,  and  adult  participation  in  learning  has  significantly  declined.  Reforms 
supported by the Recovery and Resilience Facility and the European Social Fund Plus 
are under way  – such as the implementation  of individual  learning accounts,  e-skills 
programmes, and curriculum updates – but their full impact has yet to materialise.  

(34)  Access  to  long-term  care  services  for  older  people  remains  limited  and  public 
spending is among the lowest in the EU. The proportion of people aged 65 and over 
who require long-term care due to severe difficulties with personal care or household 
activities,  is  one  of  the  highest  in  the  EU,  at  34.3%.  The  increasing  share  of  the 
population aged 65 and over will result in even higher demand for long-term care in 
the years to come. Access challenges are compounded by shortages of workers, driven 
by low wages and low coverage of collective bargaining. To improve the availability, 
access to, and quality of services, Cyprus could introduce an integrated long-term care 
model, incorporating a robust quality assurance mechanism for all forms of long-term 
care.   

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(35) 

In view of the close interlinkages between the economies of euro-area Member States 
and  their  collective  contribution  to  the  functioning  of  the  economic  and  monetary 
union,  in  2025,  the  Council  recommended  that  the  euro-area  Member  States  take 
action,  including  through  their  recovery  and  resilience  plans,  to  implement  the  2025 
Recommendation  on 
the  euro  area.  For  Cyprus, 
recommendations (2), (3) and (5) help implement the first euro-area recommendation 
on competitiveness, while the recommendations (4) and (5) help implement the second 
euro-area recommendation on resilience, and the recommendation (1) helps implement 
the third euro-area recommendation on macro-economic and financial stability set out 
in the 2025 Recommendation. 

the  economic  policy  of 

HEREBY RECOMMENDS that Cyprus take action in 2025 and 2026 to:  

1. 

2. 

3. 

4. 

5. 

Reinforce overall defence spending and readiness in line with the European Council 
conclusions  of  6  March  2025.  Ensure  that  net  expenditure  respects  the  path 
recommended by the Council on 21 January 2025. 

In  view  of  the  applicable  deadlines  for  the  timely  completion  of  reforms  and 
investments  under  Regulation  (EU)  2021/241,  accelerate  the  implementation  of  the 
recovery  and  resilience  plan,  including  the  REPowerEU  chapter.  Accelerate  the 
implementation  of  the  cohesion  policy  programme  (ERDF,  JTF,  ESF+,  CF), 
building,  where  appropriate,  on  the  opportunities  offered  by  the  mid-term  review. 
Make  optimal  use  of  EU  instruments,  including  the  opportunities  provided  by  the 
InvestEU  and  the  Strategic  Technologies  for  Europe  Platform,  to  improve 
competitiveness.  

Strengthen research and innovation and the commercialisation of research results by 
fostering  public  and  private  R&D 
investment,  enhancing  research-business 
synergies, and adopting a continuous long-term research and innovation strategy with 
input-output indicators and multiannual funding. Facilitate the diversification of the 
economy  and  further  productive  investment  by  enabling  alternative  saving  and 
investment instruments, increasing financial literacy, facilitating the participation in 
capital  markets  and  improving  access  to  non-bank  financing  opportunities  for 
businesses.  Simplify regulation,  improve regulatory tools and reduce administrative 
burden,  especially  focusing  on  improving  licensing  and  permitting  procedures  for 
investment  and  setting  up  new  businesses.  Improve  the  governance  of  state-owned 
enterprises  by  aligning  it  with  international  best  practices,  including  merit-based 
nomination of boards, ownership policy and performance-based management. 

Reduce overall reliance  on fossil fuels  and further diversify  energy supply,  notably 
by  developing  energy  interconnections  with  neighbouring  countries,  scaling-up 
funding  for  energy  efficiency,  promoting  sustainable  transport  and  upgrading  the 
electricity grid and energy storage facilities, to accommodate an increasing share of 
renewables. Address energy poverty. Step up investments in water, waste water, and 
waste  management  infrastructure,  promote  sustainable  water  use  practices,  and 
strengthen efforts to prevent waste and improve the separate collection of municipal 
and  packaging  waste.  Improve  the  implementation  of  climate  adaptation  measures, 
by focusing on improving the institutional framework governing climate adaptation. 

Address  labour  shortages  and  skills  mismatches  by  strengthening  labour  market 
participation  of  young  people,  further  increasing  the  capacity  and  attractiveness  of 
vocational education and training as well as promoting adult learning. Step up policy 
efforts  to  strengthen  green  and  digital  skills.  Further  increase  participation  in  early 
childhood  education  and  care,  improve  basic  skills,  and  increase  students’ 

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participation  in  science,  technology,  engineering  and  mathematics  (STEM)  fields. 
Improve  the  availability  of  and  access  to  long-term  care  services  by  introducing  a 
modern, adequately funded, integrated long-term care model. 

Done at Brussels, 

For the Council 
The President 

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