Finance minister Harris Georgiades said that the government does not share the European Commission’s position, stipulated in a letter sent to the minister that Cyprus needs additional fiscal consolidation measures.
Georgiades was commenting on state radio CyBC on Wednesday, hours after the Cyprus News Agency reported that the Vice-President of the European Commission Valdis Dombrovskis, in charge of financial stability, and Economic and Financial Affairs Commissioner Pierre Moscovici said that Cyprus may substantially fail in balancing its 2017 budget in structural terms.
The two commissioners said in their letter to the finance minister that the draft budget submitted by Cyprus to European Union institutions provides for a deterioration of the net structural position from a surplus of 1.5 per cent of gross domestic product in 2015 to a 0.1 per cent deficit this year and a 2 per cent deficit next year, the Cyprus News Agency reported.
“In line with the provisions of Article 7 of Regulation (EU) No. 473/2013 of 21 May 2013, we are writing to consult you on the reasons why Cyprus plans a change in the structural balance in 2017 which is well below the requirements of the preventive arm of the stability and growth pact,” Dombrovskis and Moscovici said in their letter, according to the Cyprus News Agency.
Moscovici said on September 27 that Cyprus continued to face “quite significant” fiscal risks. He then asked for a resumption of the stalled reform process, a strengthening of the foreclosure and insolvency framework to reduce non-performing loans to minimise fiscal risks as Cyprus’s economic recovery was “fragile” and domestic imbalances persisted.
Reuters reported on Tuesday that the EU Commission requested similar clarifications also from Belgium, Finland, Portugal, Spain and Lithuania.
“I don’t expect there will be an issue, it would be absurd to raise an issue for a state which budgets in a marginal deficit of ca. 0.5 per cent (of GDP) which allows for a primary surplus of 2.5 per cent without raising an issue with other countries, which submit budgets aiming at a 2.5 per cent to 3 per cent deficit,” Georgiades commented. “If the European Commission believes that Cyprus needs further fiscal adjustment, a larger fiscal surplus, then I disagree, it would be completely absurd”.
Georgiades said that Cyprus was among the best fiscal performers over the 2014 to 2016 period in the EU, and therefore he didn’t not “believe that the Cypriot economy as it stands today, needs additional fiscal adjustment and consolidation” and rejected that the allegation of fiscal relaxation.
The finance minister, who oversaw Cyprus’s economic recovery, has repeatedly warned of the need to avoid repeating the mistakes that led to the 2013 fiscal and banking crisis.
The Commission “seeks to continue a constructive dialogue with Cyprus in order to come to a final assessment,” the two EU Commissioners said in their letter according to the Cyprus News Agency. “We would welcome your views by 27 October 2016, close of business, to allow the Commission to take these into account in its further analysis. Our services stand ready to assist you in this process”.
Georgiades said that, while he had not read the letter, he was expecting it. He would send his response by tomorrow Thursday as requested by the two Commissioners, he continued, and added that he would be prepared to defend his position at the next meeting with his European colleagues.
“We will offer explanations, because we believe we can offer good explanations,” he said, as he questioned the move of the two commissioners. “It would be a very peculiar approach, both politically and procedurally, from the EU to raise an issue with a member state that essentially has a balanced budget with a marginal deficit and ask for more effort without doing so with other, larger member states,” he said.
Should Cyprus be forced to generate a primary surplus of 3.5 per cent of economic output, compared with the 1.9 per cent primary surplus included in next year’s budget, it would equal “an excessive situation that, instead of helping the economy, would compress it,” he said. ““Even Greece, which has a debt-to-GDP ratio of 200 per cent, is not asked to generate this primary surplus and it would be inconceivable to ask it of Cyprus, which has half of that debt (ratio), slightly over the EU average”.
Georgiades’s comments came a week after the Fiscal Council, an independent body tasked with monitoring budget drafting and fiscal developments to promote responsibility in public finances, recommended a more conservative approach over the medium term, citing fears that a negative dynamic could ensue amid inelastic expenditure and external uncertainties. While the finance ministry did not respond to the Fiscal Council’s findings officially, media reports said that the finance ministry was displeased with the report.
Cyprus generated a fiscal deficit of 1 per cent of economic output last year after posting a budget gap of 8.8 per cent in 2014. In both cases, the deficit was financial caused by support extended to the Cooperative Central Bank. This year, the government is projecting a fiscal shortfall of 0.3 per cent of the economy accompanied by a primary surplus of 2.3 per cent. The latest 2017 finance ministry forecast provides for a 0.6 per cent fiscal deficit.