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Structural reforms needed

By George Markopouliotis

The European Commission published the annual Country Reports, a set of analytical documents that provide an overview of the economic and social challenges for all Member States except Greece, which is under a dedicated stability-support programme.

The reports are part of the European Semester, an annual exercise that provides a framework for the coordination of economic policies between the countries of the European Union. This exercise allows the EU member countries to discuss their economic and budget plans and monitor progress at specific times throughout the year.

The Reports also assess the progress of each Member State with implementing the country specific recommendations made by the European Commission last May and endorsed by the Ministers of all Member States last July. These recommendations aim to set a positive reform agenda and they also form part of the European Semester exercise.

Overall, Member States are making headway in implementing the individual policy guidance they received last year around the “virtuous triangle” of boosting investment, pursuing structural reforms and ensuring responsible fiscal policies.

European Commission Vice-President Valdis Dombrovskis said: “Analysis shows that our policy strategy, based on boosting investment, pursuing structural reforms and sound budgetary policies, is bearing fruit. This is why, rather than giving people false promises that cannot be delivered, we should stay the course and continue to address the legacies of the crisis and structural weaknesses in our economies.”

The analysis for Cyprus indicates that excessive imbalances remain. In particular, these relate to very high non-performing loans in the financial sector and high debt – despite the progress made on reducing these loans, coupled with high unemployment and weak potential growth – a legacy from the crisis. Cyprus also made some progress on promoting investment. Moreover, the Guaranteed Minimum Income allowed more targeted and effective welfare benefits, at a lower fiscal cost.

On the other hand, there was limited progress on employment services and healthcare reform, on implementing fiscal-structural reforms and on measures to lower private-sector debt.

More specifically, the analysis shows that unemployment is decreasing, but still high at 13.3% end-2016. The crisis led to a rise in inequality, risk of poverty and social exclusion, and this still has a bearing on key social indicators.
Private debt has recently started to decline, but remains very high. Repayment of debt has been modest, notably due to weak enforcement of contracts and the limited use of the insolvency and foreclosure frameworks. The housing market is showing early signs of stabilisation, which might contribute to deleveraging.

A high level of non-performing loans continues to hamper the banking sector. Intensified efforts by banks to restructure loans have started to deliver results and non-performing loans are slowly declining.

Public debt is high, but falling. Its sustainability remains subject to sizeable risks, notably with regard to risks of deterioration of the structural balance in a context of fiscal relaxation.

The analysis for Cyprus also stresses that decisive implementation of key structural reforms would help reduce inefficiencies in the public sector, the judiciary and the healthcare sector.

George Markopouliotis is head of the European Commission Representation in Cyprus

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