Filenews 23 May 2022
A reduction in dependence on fossil fuels and acceleration of the development of renewable energy sources is proposed to Cyprus by the Commission, in the context of the findings of the European Semester for 2022, stressing that it would be good for the country to make its development model more broad and environmentally sustainable.
The Commission also proposes to improve the governance of government institutions on the basis of international standards, to strengthen the supervision of the financial sector and to strengthen the legal framework for the implementation of judicial decisions.
At the same time, according to the assessment carried out for Cyprus through the Alert Mechanism, the country is facing excessive macroeconomic imbalances. As added, public and private debt ratios have declined thanks to the recovery in 2021 and NPLs have declined significantly although they remain high. However, the invasion of Ukraine is causing uncertainty due to the openings of Cyprus in the provision of services. For this, he added, although the Recovery and Resilience Plan is expected to address several of the problems, there is room for more action to address the situation.
During the presentation of the European Semester, Commission Executive Vice-President Valdis Dombrovskis underlined that the Recovery and Resilience Fund was one of the elements that ensured that European economies were well off before the start of the war, which is why growth is to be expected in 2022 and 2023, albeit lower than initially forecast.
Mr. Dombrovskis also said that the policies of the REPowerEU package for de-dependence on Russian fossil fuels are part of the plans, calling on member states to include a relevant chapter in the national Recovery and Resilience Plans.
For his part, Economy Commissioner Paolo Gentiloni announced that the activation of the general escape clause of the Stability and Growth Pact continues in 2023, noting that Europe has not entered conditions of a normal economy, but underlining that the Commission does not propose a return to spending without restrictions, but a gradual return from general support due to the pandemic to more personalised policies.
Reduction of dependence on minerals, sustainable development model
In addition to the implementation of the recovery plan, the Commission records the following proposals:
- improving the governance of governmental organisations on the basis of international standards,
- reducing general dependence on fossil fuels and further diversifying energy supply by accelerating the development of renewables, in particular by further streamlining licensing procedures and expanding pv coverage, developing interconnections with neighbouring countries and expanding and accelerating energy efficiency measures, including in the transport sector;
- strengthening the legal framework for the implementation of court decisions and contractual claims,
- strengthening the supervision of the financial sector, and
- further diversification and environmental sustainability of the country's economic development model, on the basis of the support provided by the national recovery and resilience plan and through the implementation of a long-term strategy.
In the Commission's report on the National Reform Plan and the Stability Programme of Cyprus, it is noted that the Recovery and Resilience Plan contains measures to strengthen economic and financial stability for a more resilient banking sector, reduce risks related to private debt, better supervise the non-banking sector and create a more effective one, an efficient and fair tax system.
It is also noted that the national plan improves the efficiency and digitisation of the public sector (including judicial authorities) as well as digital connectivity by introducing anti-corruption measures. It also improves access to healthcare and promotes the transition to digital health systems, increases the quality of education at all levels, including in terms of digital skills and youth employment, increases recycling capacities and infrastructure and infrastructure for wastewater management.
Excessive imbalances, reduction of NPLs, effects due to Ukraine
As Executive Vice-President Dombrovskis said, the Commission analysed the macroeconomic situation in 12 Member States through the Alert Mechanism. Of these, Greece, Italy and Cyprus are experiencing excessive imbalances, while France, Germany, Spain, the Netherlands, Portugal, Romania and Sweden are still experiencing macroeconomic imbalances. Ireland and Croatia are no longer experiencing imbalances, as debt ratios have declined significantly and continue to decline.
More specifically, regarding the macroeconomic imbalances in the Cypriot economy, the Commission said in a statement that the weaknesses identified "are related to high government and private debt, large current account deficits and the still high stock of non-performing loans".
"Public and private debt-to-GDP ratios declined again thanks to the strong economic recovery in 2021. Non-performing loans in the banking sector have decreased significantly thanks to large sales of such loans to credit acquiring companies, but remain high," the Commission's analysis states.
At the same time, "the current account deficit is large despite the improvement recorded in 2021, and in addition it is expected to widen in 2022 and to decline slowly thereafter, thus not ensuring a prudent medium-term net international investment position."
"Government and private debt-to-GDP ratios are expected to improve further, partly due to economic growth," it noted.
"However, the economic outlook for 2022 is surrounded by increased uncertainty related to the impact of Russia's invasion of Ukraine, given the particularly significant openings in trade in services," it added.
"If implemented in a timely and effective manner, the Recovery and Resilience Plan has the potential to contribute to a significant reduction in vulnerabilities, but additional policy actions can be justified," it is stressed.
