CELEX: 52011SC0803
Language: en
Date: 2011-06-07 00:00:00
Title: Recommendation for a COUNCIL RECOMMENDATION on the National Reform Progamme 2011 for Cyprusand delivering a Council opinionon the updated Stability Programme of Cyprus, 2011-2014

|
			
		
		
		52011SC0803
		
			Recommendation for a COUNCIL RECOMMENDATION on the National Reform Progamme 2011 for Cyprusand delivering a Council opinionon the updated Stability Programme of Cyprus, 2011-2014 /* SEC/2011/0803 final */
			
				
		
		
			
			   	Recommendation for a
COUNCIL RECOMMENDATION
on the National Reform Progamme 2011 for Cyprus
and delivering a Council opinion
on the updated Stability Programme of Cyprus, 2011-2014
THE COUNCIL OF THE EUROPEAN UNION,
Having regard to the Treaty on the
Functioning of the European Union, and in particular Articles 121(2) and 148(4)
thereof,
Having regard to Council Regulation (EC) No
1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary
positions and the surveillance and coordination of economic policies[1],
and in particular Article 5(3) thereof,
Having regard to the recommendation of the
European Commission[2],
Having regard to the conclusions of the
European Council,
Having regard to the opinion of the
Employment Committee,
After consulting the Economic and Financial
Committee,
Whereas:
(1)              
On 26 March 2010, the European Council agreed to
the European Commission’s proposal to launch a new strategy for jobs and
growth, Europe 2020, based on enhanced coordination of economic policies, which
will focus on the key areas where action is needed to boost Europe’s potential
for sustainable growth and competitiveness.
(2)              
On 13 July 2010, the Council adopted a
recommendation on the broad guidelines for the economic policies of the Member States and the Union (2010 to 2014) and, on 21 October 2010, adopted a decision on guidelines
for the employment policies of the Member States,[3]
which together form the ‘integrated guidelines’. Member States were invited to
take the integrated guidelines into account in their national economic and
employment policies.
(3)              
On 12 January 2011, the Commission adopted the
first Annual Growth Survey, marking the start of a new cycle of economic
governance in the EU and the first European semester of ex-ante and integrated
policy coordination, which is anchored in the Europe 2020 strategy. 
(4)              
On 25 March 2011, the European Council endorsed
the priorities for fiscal consolidation and structural reform (in line with the
Council’s conclusions of 15 February and 7 March 2011 and further to the
Commission’s Annual Growth Survey). It underscored the need to give priority to
restoring sound budgets and fiscal sustainability, reducing unemployment
through labour market reforms and making new efforts to enhance growth. It
requested Member States to translate these priorities into concrete measures to
be included in their Stability or Convergence Programmes and National Reform
Programmes.
(5)              
On 25 March 2011, the European Council also
invited the Member States participating in the Euro Plus Pact to present their
commitments in time to be included in their Stability or Convergence Programmes
and their National Reform Programmes. 
(6)              
On 6 May 2011, Cyprus submitted its National
Reform Programme and on 7 May 2011 its updated Stability Programme covering the
period 2010-2014. In order to take account of the interlinkages, the two
programmes have been assessed at the same time.
(7)              
The Cypriot economy is recovering moderately
after experiencing the first economic contraction in the last thirty-five years
in 2009, when real GDP fell by 1.7 %. The
labour market suffered from the recession, with unemployment reaching
6.5 % in 2010. Public finances also deteriorated. From a surplus, the
general government budget dropped to a deficit of 6 % of GDP in 2009,
driven by automatic stabilisers, discretionary fiscal
stimulus measures to counter the economic downturn and rather large effects due to a less tax-rich growth pattern. Economic activity
improved moderately in 2010 with growth at 1 %, mainly driven by inventory
accumulation, after the large destocking that took place in 2009, in tandem
with a mild resumption of private consumption. The strengthening economic
outlook is expected to benefit the labour market, employment is projected to
recover modestly while unemployment should ease gradually from its peak at the
end of 2010. 
(8)              
Based on the assessment of the updated Stability
Programme pursuant to Council Regulation (EC) No 1466/97, the Council is of the
opinion that the macroeconomic scenario underpinning the budgetary projections
is plausible until 2012, but too favourable thereafter, as assessed against the
Commission services' spring 2011 forecast. The Stability Programme aims to
reduce the budgetary deficit to 4 % of GDP in 2011 and 2.6 % in 2012, in line with the Council recommendations, and
to continue consolidation afterwards. The programme
projects the debt ratio to peak in 2012 and to decline thereafter. The annual average improvement in the structural
balance for the period 2011-12 is 1.5 % of GDP, in line with the Council recommendations. However, the
structural improvement is set to be below the requirements of the Stability and
Growth Pact in both 2013 and 2014. The medium-term
objective (MTO), which is reaffirmed as a balanced budget in structural terms, will not be reached within the programme period. While the overall
adjustment planned is based on expenditure restraint, most measures in 2011 are
on the revenue side. Overall, there are downside risks to the
consolidation path mapped out in the programme, associated with the continued
rebalancing towards a less tax-rich growth pattern, the practice of adopting
supplementary budgets during the course of the year and the timely
implementation of measures which are still to be
agreed with the social partners and others still to be specified (e.g.
containment of current expenditure). In view of these risks, additional
measures may need to be adopted if macroeconomic or budgetary developments turn
out to be worse than expected. 
(9)              
Despite the decline to around 9 % of GDP in
2010, the current account deficit is still large and likely to constrain
economic growth over the medium term. High public-sector outgoings need to be
financed by either foreign debt or higher domestic private savings. The latter
would imply lower output growth by crowding out private consumption or
investment. In the medium term, the deficit would continue improving, but at a
moderate rate. On 13 July 2010, in the context of the excessive deficit
procedure, the Council recommended to the Cypriot authorities to strengthen the
binding nature of their medium-term budgetary framework too. Until now, no
progress has been reported. According to the Stability Programme, the
medium-term budgetary framework is to be fully implemented from the fiscal year 2014 onwards, rather than 2012, as expected
until recently. Therefore, its impact would be felt only in the medium term. Timely implementation of the new framework would be important for
successful and lasting consolidation of the public finances.
(10)          
The banking sector weathered the global
financial crisis and the sovereign debt crisis in the euro area well, without any
need for government intervention. However, with assets of more than six times GDP,
excluding subsidiaries and branches of foreign banks, and ten times GDP when
they are included, the banking sector is large in relation to the economy.
Moreover, it is relatively concentrated, with the market dominated by three
domestic groups that hold about 55 % of total consolidated banking assets,
excluding the cooperative banks. The ongoing risks on international financial
markets call for continuation of conservative balance-sheet management and for
prudent supervision. There are two different supervisors: the Central Bank of Cyprus for commercial banks and the Authority for the Supervision and Development of
Cooperative Societies (ASDCS) for cooperative credit institutions. In spite of the
IMF recommendation to have a single supervisor for both banks and cooperative
credit institutions, no progress has been made. 
(11)          
The projected long-term budgetary impact of
ageing is well above the EU average, mainly as a result of a relatively strong
increase in pension expenditure as a share of GDP over the decades ahead. A
pension reform was introduced in April 2009. It is aimed mainly at the revenue
side and would only slightly slow down the rise in pension expenditure. Progress
on healthcare reform, with the aim of curbing the projected rise in expenditure
by establishing a national health system and transforming public hospitals into
autonomous entities, has been very limited.
(12)          
The twice-a-year automatic cost-of-living
allowance (COLA) adjustment is linked directly to the average percentage change
in the consumer price index (CPI) over the last six months compared with the
preceding six months. It enjoys strong support from the social partners and has
remained non-negotiable during the collective bargaining process. However, its
uniform application does not allow wages to reflect productivity differences
across sectors. The shortcomings of the COLA are, first, that wages are
connected to product prices only and not to productivity gains. Second, those
benefiting most from this system are those with higher incomes (70 % of whom
have wages that are index-linked via the COLA), whereas most of the lowest-paid
(e.g. unskilled workers) are not covered (only 6 % are index-linked
by the COLA). Third, the COLA also has a significant impact on public finances
as, beyond wages and salaries, it is also an integral feature of pensions,
benefits and other allowances.
(13)          
While labour participation in Cyprus is higher than the EU average, the labour market displays strong gender imbalances.
Gender employment gaps, the cost and
availability of childcare facilities (including geographical location and proximity
to places of work), the scarcity of flexible forms of employment and the persistently high gender pay gap are
acknowledged in the NRP as major bottlenecks hindering employment and growth.
While educational attainment at secondary school and university level in
  Cyprus is high, vocational education and training (VET) does not appear to be
an attractive option. High youth unemployment, combined with a high proportion
of people with high educational attainment in total unemployment, is a sign of a
significant skills mismatch in the Cypriot economy. Also, participation in
lifelong learning is low for a country that has generally good educational
levels, particularly for certain groups (the low-skilled, older people and the unemployed).
To address these issues, the NRP envisages establishing a series of new
post-secondary VET institutions from 2012-2013 on. There are also plans to
introduce the new apprenticeship system in the same academic year. Overall, the country’s strategic objective
of shifting from low- to high-productivity jobs would benefit greatly from the
reorientation of the education and training system to bring about a better mix
of skills to match the labour market demand. 
(14)          
Cyprus adopted a general law for transposition of the Services
Directive in July 2010. However, there are concerns about the completeness
and thoroughness of the transposition, as many obstacles to establishment and
free provision of services persist in sector-specific legislation, where no
amendments have been made. These obstacles range from generally applicable ones,
such as authorisations required by local authorities for any business activity
or the limited duration of authorisations, irrespective of the field and the
risks involved, to very specific ones, such as fixed tariffs applicable to tourism
services, economic needs tests and involvement of competitors in the
authorisations for car rentals, discriminatory treatment of construction
companies from other Member States and bans on architects and engineers exercising
their profession as legal persons.
(15)          
Overall, environmental constraints and issues connected
with resource and energy use could create severe bottlenecks to growth. These
are related to its specific geographical location and to the consequences of
climate change in the form of severe droughts. The cost-effectiveness of
support schemes for renewable energy would need to be assessed. The functioning
of the energy sector can be significantly improved in the short term already, by
means of market liberalisation, introduction of competition and facilitation of
infrastructure investments. 
(16)          
Cyprus has made a number
of commitments under the Euro Plus Pact.[4] On the fiscal
side, the Pact commits the country to strengthen fiscal sustainability by
preparing a framework law for dealing with financial crises and setting up a
fully independent Financial Stability Fund. Furthermore, a dialogue on
restructuring the public pension system is taking place and should be concluded
by the end of 2011. Employment measures are focusing on combating illegal and
undeclared work, addressing the skills mismatch and increasing the
competitiveness of enterprises. The competitiveness measures cover containing
public-sector wages (redesigning the wage indexation mechanism), strengthening
the competitiveness of SMEs, finalising the National Digital Strategy by 2011
and promoting energy efficiency and renewable energy sources. These commitments
reflect the four areas of the Pact. They provide for continuity of the broader reform
agenda outlined in the Stability and National Reform Programmes and confirm the
plans already announced to deliver reforms to address the country’s structural
weaknesses, without at this stage specifying a timeframe to address issues such
as the public-sector wages and pension system. These commitments have been
assessed and taken into account in the recommendations.
(17)          
The Commission has assessed the Stability
Programme and National Reform Programme, including Euro Plus Pact commitments[5].
It has taken into account not only their relevance for sustainable fiscal and
socio-economic policy in Cyprus but also their respect of EU rules and
guidance, given the need to reinforce the overall economic governance of the
European Union by providing EU-level input into future national decisions. In
this light, the Commission considers that more efforts are needed on achieving
the 2011 budget deficit target and that additional consolidation measures
should be specified for 2012 and beyond. In order to improve the long-term
sustainability of public finances, further action on the pension and healthcare
system is needed. Further steps should also be taken to strengthen the prudential
framework of banking supervision, to adjust the wage-indexation system and to
improve vocational education, training and skills, the business environment and
energy efficiency. 
(18)          
In the light of this assessment, also taking
into account the Council Recommendation of 13 July 2010 under Article 126(7) of
the Treaty on the Functioning of the European Union, the Council has examined
the 2011 update of the Stability Programme of Cyprus and its opinion[6]
is reflected in particular in its recommendations (1) and (3) below. Taking
into account the European Council conclusions of 25 March 2011, the Council has
examined the National Reform Programme of Cyprus,
HEREBY RECOMMENDS that Cyprus should take action within the period 2011-2012 to: 
(1)                   
Adopt the necessary measures of a permanent
nature to achieve the correction of the excessive deficit by 2012. Take
measures to keep tight control over expenditure and make use of any better-than-expected
budgetary developments for faster deficit and debt reduction. Ensure progress
towards the Medium Term Objective by at least 0.5% of GDP annually. Accelerate
the phasing-in of an enforceable multiannual budgetary framework with a binding
statutory basis and corrective mechanisms, as from the preparation of the 2012
Budget, as well as Programme and Performance Budgeting.
(2)                   
Strengthen further the prudential framework for
supervision of banks and cooperative credit societies to ensure early detection
of risks.
(3)                   
Improve the long-term sustainability of public
finances by implementing reform measures to control pension and healthcare
expenditure in order to curb the projected increase in age-related expenditure.
For pensions, extend years of contribution, link retirement age with life
expectancy, while taking care to address the high at-risk-of-poverty rate for
the elderly. For healthcare, take further steps to accelerate implementation of
the national health insurance system. 
(4)                   
Reform, in consultation with social partners and
in accordance with national practices, the system of wage bargaining and wage
indexation to ensure that wage growth better reflects developments in labour
productivity and competitiveness. 
(5)                   
Take further steps, within the reforms planned
for the vocational education and training system, to match education outcomes
to labour market needs better, notably by setting up a post-secondary
vocational education and training institute. Take measures to increase the
effectiveness of the vocational training system by increasing the incentives for
and improving access to vocational education and training, especially for the
low-skilled, women and older workers.
(6)                   
Abolish remaining obstacles to the establishment and free provision of
services in
sector-specific legislation by October 2011 in order to create more
opportunities for growth and jobs in the services sector. 
(7)                   
Introduce measures to increase competition in
network services by allowing greater freedom to set prices. Establish, by 2012,
a water management plan and a price-setting scheme reflecting cost efficiency
and equity concerns in order to ensure more sustainable management of water
resources.
Done at Brussels,
                                                                       For
the Council
                                                                       The
President
[1]               OJ L 209, 2.8.1997, p. 1.
[2]               OJ C , p. .
[3]               Maintained for 2011 by Council Decision 2011/308/EU
of 19 May 2011.
[4]               More details on the commitments made under the Euro
Plus Pact can be found in (SEC(2011) 721.
[5]               SEC(2011) 721.
[6]               Foreseen in Article 5(3) of Council Regulation (EC)
No 1466/97.