Cyprus is amongst a group of three Eurozone countries, along with Malta and Belgium, and two non-Eurozone members, Poland and Hungary, which European Commission Vice President for Economic and Monetary Affairs Olli Rehn has called today to present specific measures to the European Commission by the end of December, in order to ensure their budget deficit reduction below 3% of GDP by 2012. Rehn, who was speaking during today’s presentation of the European Commission’s autumn forecast for the period 2011-2013, referred to the five member states due to their excessive deficit and their obligation to bring it under 3%. While the deadline for some member states is the end of 2011, the period available for Cyprus is by the end of next year. The Commission Vice President added that according to the European Commission predictions, a number of member states under the excessive deficit procedure are not addressing their deficit in a permanent and viable way. He also said that the five countries should make use of the time available in order to address their deficit, until the new economic governance comes into force. Moreover, Rehn said he had already informed the Finance Ministers of the countries in question in the margins of the last Ecofin Council session, while he added that he would soon formulate the requirements in writing. The European Commission requests that measures be adopted prior to December 15, because stricter EU regulations are expected to come into force after this date, regarding the member state’s economic governance, which also provide for financial penalties. Concerning the overall outlook, the European Commission autumn forecast draws a pessimistic picture concerning the EU economy, while it revises previous predictions on the Cypriot economy to the worse. According to the country report, GDP growth was negatively affected in Cyprus, as a result of the explosion at the naval base in Mari and the destruction of the nearby Vassilikos power plant, last July, despite having an excellent tourist season in 2011. Thus, it predicts that growth in Cyprus will not exceed 0.3% in 2011, while further deterioration and zero growth are expected for 2012. The report says GDP in 2013 will grow by 1.8%. The forecast also predicts a public deficit of 6.7% for this year and 4.9% for 2012, which again puts Cyprus behind its goal, unless new measures are undertaken. Public debt is also expected to continue to increase during the next two years and the report says it will rise to 70.9% of GDP by the end of 2013. It is further noted that little to zero growth is expected to harm employment, and therefore unemployment is expected to continue to rise in 2011 and 2012, while a small decrease is expected in 2013, reaching 7.1%. The current account balance will decrease due to the slowdown in economic growth and the reduction of imports, while inflation is expected to recede from 3.4% this year to 2.3% in 2013. Domestic demand is expected to shrink in 2011, due to tightening bank lending conditions coupled with a worsening labor market outlook. The same is also expected to happen with investments, due to weak foreign demand for housing and a restructuring of corporate balance sheets. The report predicts a rise in exports of services, due to tourism and the political instability in competing markets. Following a period of stagnation in 2012, the report says economic activity is set to resume in 2013. Indicators also point to a weakening of consumer and business confidence. Recovery is expected during the second half of 2012, alongside the improvement of the external environment, the start of the tourist season and the resumption of investment projects, and the reconstruction of the Vassilikos power plant in particular. Moreover, the report on Cyprus notes that the risks associated with the financial market’s reactions to developments in the Euro area, as well as adverse spillovers from Greece, in view of the large exposure of the financial sector are not negligible. It adds however, that successful implementation of fiscal consolidation, the promising results of the gas exploration, and the continuation of turmoil in the Middle East may further strengthen Cyprus as “a regional safe haven” in tourism, trading and shipping. Furthermore, the country report notes that the two main measures proposed by the government, concerning the targeting of social transfer and the increase of the VAT rate, have not been adopted yet. Thus, the report predicts a deficit of 4.9%, compared to the government’s prediction of 2.8%, while a reduction to 4.7% is expected to happen further in 2013. The debt to GDP ratio will remain on the rise and reach almost 71% of GDP by 2013, while the report notes that debt projections include the impact of guarantees to EFSF, bilateral loans to Greece and Cyprus’ participation in the capital of the ESM.Cyprus is amongst a group of three Eurozone countries, along with Malta and Belgium, and two non-Eurozone members, Poland and Hungary, which European Commission Vice President for Economic and Monetary Affairs Olli Rehn has called today to present specific measures to the European Commission by the end of December, in order to ensure their budget deficit reduction below 3% of GDP by 2012.

Rehn, who was speaking during today’s presentation of the European Commission’s autumn forecast for the period 2011-2013, referred to the five member states due to their excessive deficit and their obligation to bring it under 3%. While the deadline for some member states is the end of 2011, the period available for Cyprus is by the end of next year.

The Commission Vice President added that according to the European Commission predictions, a number of member states under the excessive deficit procedure are not addressing their deficit in a permanent and viable way. He also said that the five countries should make use of the time available in order to address their deficit, until the new economic governance comes into force.

Moreover, Rehn said he had already informed the Finance Ministers of the countries in question in the margins of the last Ecofin Council session, while he added that he would soon formulate the requirements in writing.

The European Commission requests that measures be adopted prior to December 15, because stricter EU regulations are expected to come into force after this date, regarding the member state’s economic governance, which also provide for financial penalties.
Concerning the overall outlook, the European Commission autumn forecast draws a pessimistic picture concerning the EU economy, while it revises previous predictions on the Cypriot economy to the worse.

According to the country report, GDP growth was negatively affected in Cyprus, as a result of the explosion at the naval base in Mari and the destruction of the nearby Vassilikos power plant, last July, despite having an excellent tourist season in 2011. Thus, it predicts that growth in Cyprus will not exceed 0.3% in 2011, while further deterioration and zero growth are expected for 2012. The report says GDP in 2013 will grow by 1.8%.

The forecast also predicts a public deficit of 6.7% for this year and 4.9% for 2012, which again puts Cyprus behind its goal, unless new measures are undertaken.

Public debt is also expected to continue to increase during the next two years and the report says it will rise to 70.9% of GDP by the end of 2013.

It is further noted that little to zero growth is expected to harm employment, and therefore unemployment is expected to continue to rise in 2011 and 2012, while a small decrease is expected in 2013, reaching 7.1%.

The current account balance will decrease due to the slowdown in economic growth and the reduction of imports, while inflation is expected to recede from 3.4% this year to 2.3% in 2013.

Domestic demand is expected to shrink in 2011, due to tightening bank lending conditions coupled with a worsening labor market outlook. The same is also expected to happen with investments, due to weak foreign demand for housing and a restructuring of corporate balance sheets.

The report predicts a rise in exports of services, due to tourism and the political instability in competing markets. Following a period of stagnation in 2012, the report says economic activity is set to resume in 2013.

Indicators also point to a weakening of consumer and business confidence. Recovery is expected during the second half of 2012, alongside the improvement of the external environment, the start of the tourist season and the resumption of investment projects, and the reconstruction of the Vassilikos power plant in particular.

Moreover, the report on Cyprus notes that the risks associated with the financial market’s reactions to developments in the Euro area, as well as adverse spillovers from Greece, in view of the large exposure of the financial sector are not negligible.

It adds however, that successful implementation of fiscal consolidation, the promising results of the gas exploration, and the continuation of turmoil in the Middle East may further strengthen Cyprus as “a regional safe haven” in tourism, trading and shipping.

Furthermore, the country report notes that the two main measures proposed by the government, concerning the targeting of social transfer and the increase of the VAT rate, have not been adopted yet. Thus, the report predicts a deficit of 4.9%, compared to the government’s prediction of 2.8%, while a reduction to 4.7% is expected to happen further in 2013.

The debt to GDP ratio will remain on the rise and reach almost 71% of GDP by 2013, while the report notes that debt projections include the impact of guarantees to EFSF, bilateral loans to Greece and Cyprus’ participation in the capital of the ESM.