Cyprus is experiencing excessive imbalances, according to the 2018 European Semester`s assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews (under Regulation EU No 1176/2011) published today by the European Commission.
According to the report “Cyprus, Croatia and Italy are identified, as in 2017, to be experiencing excessive imbalances”, but “no tangible improvement is recorded in Cyprus, where policy implementation has also been rather limited.”
More specifically, according to a communication for the Commission to the European Parliament, the Council, the Εurogroup and the European Central Bank, (2018 -120/2), in Cyprus “a very high share of non-performing loans burdens the financial sector and high stock of private, public, and external debt hangs on the economy, in a context of still relatively high, even though declining, unemployment and weak potential growth.”
This was the first time that the Commission is also examining “aggressive tax planning” as Commissioner Pierre Moscovici revealed.
This practice “entails significant losses to European taxpayers; the transposition of EU legislation will help curtailing such practices,” according to the Commission report.
“Revenue losses from profit shifting within the EU alone are estimated at EUR 50-70 billion” and “aggressive tax planning distorts the playing field among companies, and unfairly diverts resources from governments` spending objectives.”
“Belgium, Cyprus, Malta and the Netherlands are amending aspects of their tax systems that have facilitated aggressive tax planning,” says the European Commission and warns that by the end of 2018, Member States have to transpose the provisions of the Anti-Tax Avoidance Directive (ATAD) into their national law.
According to the European Commission, “the current account is still negative and widening, and is not adequate to guarantee a sustainable evolution of the large net external liabilities stock.”
Moreover “private debt is only slowly decreasing, and credit flows to the private sector are picking up despite very high levels of private debt.” “Loan restructuring efforts by banks, the strong cyclical upturn, and the implementation of past reforms have allowed a reduction of non-performing loans, but their stock remains very high,” states the report and warns the Cypriot authorities that “poor contract enforcement, inefficiencies in the judicial system, bottlenecks in the implementation of the foreclosure and insolvency legislation as well as weak repayment discipline hamper private sector deleveraging and the reduction of non- performing loans.”
The Commission communication to the other EU institutions states that “a prudent fiscal stance and an active debt management policy accelerated public debt reduction”, but “renewed reform momentum is needed, notably to help reduce public debt, improve competitiveness, accelerate the reduction of non-performing loans and raise potential growth.”
At the same time the European Commission says that “actions taken by all Member States are subject to ongoing assessment of their anti-corruption general policy landscape and anti-corruption efforts.” It clarifies that “it has analyzed the key challenges in the country reports for several Member States, where there are particularly significant risks and gaps that act as obstacles for investment, efficient resource allocation, economic performance and growth” and “Cyprus is implementing the action plan for growth including the framework to attract and facilitate large-scale investments.”
The European Commission informs its counterparts that “in the 2018 Alert Mechanism Report, published in November 2017 as part of the European Semester Autumn Package which started the 2018 European Semester cycle, the Commission identified 12 Member States for in-depth reviews: Bulgaria, Croatia, Cyprus, France, Germany, Ireland, Italy, the Netherlands, Portugal, Slovenia, Spain and Sweden. All 12 countries were found to experience imbalances or excessive imbalances also in 2017.”
“Croatia, Cyprus, and Italy are experiencing excessive economic imbalances”, reads the report and clarifies that “the specific monitoring reports for Cyprus, Ireland and Portugal were included in their latest post-program surveillance reports.”
While examining weaknesses in administrative capacity which add to the shortcomings of the business environment, the Commission finds that “the public procurement framework is being improved in Spain, Hungary and Romania. Portugal took measures to improve the functioning of efficiency of insolvency and tax proceedings.”
“Cyprus and the Czech Republic are progressing with rolling out e- government services and Slovenia adopted the rules that are expected to speed up the construction application procedure and strengthen the legal certainty of investors, thus providing more incentives to invest,” says the Commission.
The country reports published are issued in line with the 2018 Alert Mechanism Report, and their conclusions are an integral part of the reports for Bulgaria, Croatia, Cyprus, France, Germany, Ireland, Italy, the Netherlands, Portugal, Slovenia, Spain, and Sweden.
The country reports also review Member States` progress with the implementation of the country-specific recommendations over the years, by taking a multi-annual perspective, as is now done under the European Semester cycle to account for the time needed for the full implementation of critical reforms. Last but not least, the country reports trace progress towards the Europe 2020 targets.
In April the governments will have to present their own national reform programmes and the European Commission in May will issue the relevant recommendations after inspecting them.