Saturday, 12 June 2010

EU Council opinion on stability programme of Cyprus

After looking at the Cypriot government’s update and the Commission’s assessment, we turn to the Council of the European Union.



Ecofin conclusions



The Council (Economic and Financial Affairs; Ecofin) on 8 June 2010 presented the following conclusions (document 10689/10; on page 8):


Cyprus: stability programme

The Council adopted an opinion, as required by the EU's stability and growth pact, on an update by Cyprus of its stability programme.

Stability programmes, which are unique to member states having the euro as their currency, are aimed at ensuring sound government finances as a means of strengthening the conditions for price stability and for sustainable growth.



Council opinion


As we see, the Ecofin conclusions did not refer or link to the document in question, so instead of doing it exactly once, everyone interested in the matter is invited to do his or her own research, until the opinion is found:



Council opinion on the updated stability programme of Cyprus 2009-2013 (document 10839/10)



Economic situation

The Council began its examination of the updated stability programme of Cyprus with a brief description of the economic situation (page 3):


In 2009 economic activity contracted by 1.7%. This is the first time Cyprus has experienced negative growth in the last thirty-five years. Weak domestic demand and an adverse external environment weighed strongly on growth. In particular, high household indebtedness together with tight lending conditions, a worsening labour market outlook and negative confidence effects led to a decline in private consumption. In parallel, investment recorded a strong correction, amidst a fall in foreign demand for housing, low capacity utilisation and the restructuring of corporate balance sheets. Government consumption was the only demand component supporting economic activity, partly due to the 1½% of GDP stimulus package implemented in line with the EERP. In addition to these discretionary measures, the contraction of economic activity, the fading out of the asset boom and a less tax-rich growth pattern has put public finances under significant pressure. As a result, government finances turned into a deficit of 6.1% of GDP from a surplus of 0.9% of GDP in 2008. The crisis has also highlighted the accumulation of a high external imbalance, which reflects not only the low private sector net savings but also a deterioration of the net position of general government and competitiveness losses. A weak domestic demand and a sluggish external recovery are expected to weigh on recovery prospects. GDP growth is forecast to shrink further, although to a lesser extent, in 2010 and to recover mildly in 2011. Therefore, in the medium term, Cyprus is facing the challenge of enhancing growth, against the backdrop of a frail global economic recovery, while addressing the existing macroeconomic imbalances through maintaining prudent fiscal policies. In the long term, the country is confronted with the need to strengthen the sustainability of public finances, in view of an ageing population.



Council opinion

After a detailed discussion, the Council of the European Union invited Cyprus to (page 14):


(i) reduce the 2010 deficit to below 6% of GDP by reinforcing the consolidation measures, notably in case macroeconomic developments proves less favourable than the programme scenario, and take timely action to define a more expenditure-driven consolidation strategy; seize opportunities beyond the announced fiscal effort to accelerate fiscal consolidation and to ensure a swift reduction of the gross debt ratio back below the reference value;

(ii) implement, as envisaged, an effective multi-annual budgetary framework in order to ensure the adherence to the budgetary targets and to firmly contain expenditure over the medium -term;

(iii) improve the long-term sustainability of public finances by implementing reform measures to control pension and health care expenditure in order to curb the projected increase in age-related expenditure.



Comment

When we wrote about the previous round of Council opinions on stability and convergence programmes, we remarked that more than a month passed between the decision and its publication in the Official Journal of the European Union (OJEU).

Luckily, the opinion is available for those who care to search, although a clear reference or link in the Ecofin conclusions would have saved time and energy.

We looked favourably at the Commission’s web pages on the Stability and Growth Pact (SGP) and the Excessive Deficit Procedure (EDP) in our previous blog entry, but noticed that they had not been updated with the fairly recent Council opinion.



The latest Council opinion on Cyprus can be found through the news page of the Eurogroup. (Cyprus is a eurozone country, but the opinion is issued by the Council as a whole.)



There are no updates from 2010 concerning Cyprus or the eleven other new member states on the informative Ecofin web page Stability and convergence programmes II.



Stability and convergence programmes I, the corresponding page for old member states comes out no better.

Considering the dramatic events and continuing drama surrounding the European sovereign debt crisis, readily available and instantly updated information would seem a necessity for the Council.




Ralf Grahn