Deficits below 3% of GDP for Cyprus, Ireland and Slovenia

The European Council on Friday closed excessive deficit procedures for Cyprus, Ireland and Slovenia, confirming that they have reduced their deficits below the EU’s 3% of GDP reference value. It abrogated its previous decisions on the existence of excessive deficits in the three countries.

As a consequence, only 6 of the EU’s 28 member states will remain subject to the excessive deficit procedure, continuing an improvement observed since 2011. A peak was reached during a 12-month period in 2010 and 2011 when procedures were open for 24 countries.

Member states are required by article 126 of the Treaty on the Functioning of the European Union to avoid excessive government deficits. And the excessive deficit procedure is used to support a return to sound fiscal positions.
Following an exit from the excessive deficit procedure, member states are subject to the preventive arm of the EU’s Stability and Growth Pact.

Cyprus

Cyprus has been subject to the excessive deficit procedure since July 2010, when the Council issued a recommendation calling for its deficit to be corrected by 2012. In May 2012, the Commission identified macroeconomic imbalances that required urgent action, as the country’s banking industry threatened the sustainability of the economy. In June 2012, Cyprus requested financial assistance from international lenders.
In March 2013, an agreement was reached on a three-year economic adjustment programme and on assistance from the European Stability Mechanism and the IMF. A memorandum of understanding was signed the following month.
In view of the worse-than-expected economic downturn in Cyprus, the Council in May 2013 extended the deadline for correcting the deficit to 2016. It set headline deficit targets of 6.5 % of GDP for 2013, 8.4 % of GDP for 2014, 6.3 % of GDP for 2015 and 2.9 % of GDP for 2016.

In 2015, Cyprus’s general government deficit amounted to 1.0% of GDP, dropping below the 3% of GDP reference value one year ahead of the deadline set by the Council. In March 2016, Cyprus exited its economic adjustment programme. The Commission’s 2016 spring forecast projects headline balances of -0.4% of GDP in 2016 and 0% of GDP in 2017 under a scenario of unchanged policies. The deficit is thus set to remain below the 3% of GDP reference value over the forecast horizon.

Cyprus’s general government gross debt-to-GDP ratio increased to 108.9% in 2015 from 102.5% in 2013 on account of public support granted to the financial sector and contraction of nominal GDP. The Commission’s 2016 spring forecast projects the debt to remain stable in 2016 and to decrease to 105.4% of GDP in 2017, mainly due to a nominal increase in GPD. The Council is expected to conclude that Cyprus’s deficit has been corrected.

Ireland

Ireland has been subject to the excessive deficit procedure since April 2009, when the Council issued a recommendation calling for its deficit to be corrected by 2013. In response to a worsening of economic conditions, the Council in December 2009 extended the deadline to 2014. However, Ireland’s economic situation weakened further, as substantial measures had to be introduced to support its banking sector. In November 2010, Ireland requested financial assistance from international lenders.

Agreement was reached in November 2010 on an economic adjustment programme, which included an overhaul of the country’s banking system. Assistance from the European Financial Stabilisation Mechanism, the European Financial Stability Facility and the IMF was agreed, whilst bilateral lenders also contributed.
In December 2010, the Council extended the deadline for correcting Ireland’s deficit a second time, to 2015.
Since 2009, when its deficit peaked at around 11.5% of GDP (excluding one-off measures to support its financial sector), Ireland’s general government balance has steadily improved. In December 2013, Ireland exited its economic adjustment programme. The deficit dropped to 3.8% of GDP in 2014 and to 2.3% of GDP in 2015 (1.3% of GDP if a one-off transaction is excluded).

The Commission’s 2016 spring forecast projects deficits of 1.1% of GDP in 2016 and 0.6% of GDP in 2017 under a no-policy-change scenario. The deficit is thus set to remain below the 3% of GDP reference value over the forecast horizon. Ireland’s general government gross debt-to-GDP ratio has fallen steadily, having peaked at 120% in 2013. It fell to 93.8% of GDP in 2015 from 107.5% of GDP in 2014, due to a surge in nominal GDP and the sale of state assets, and is projected to decline further to 89.1% of GDP in 2016. The debt ratio is forecast to continue decreasing to 86.6% of GDP in 2017, also due to favourable cyclical conditions, historically low interest rates and primary budget surpluses. The Council is expected to conclude that Ireland’s deficit has been corrected.

Slovenia

Slovenia has been subject to an excessive deficit procedure since December 2009, when the Council issued a recommendation calling for its deficit to be corrected by 2013. In June 2013 however, in the light of unexpected adverse economic conditions, the Council extended the deadline to 2015. It set headline deficit targets of 4.9% of GDP in 2013, 3.3% of GDP in 2014 and 2.5% of GDP in 2015.

After peaking at 15.0% of GDP in 2013, Slovenia’s general government deficit was reduced to 5.0% of GDP in 2014 and 2.9% of GDP in 2015. The Commission’s 2016 spring forecast projects deficits of 2.4% of GDP in 2016 and 2.1% of GDP in 2017. Thus, the deficit is set to remain below the 3% of GDP reference value over the forecast horizon.
Slovenia’s general government gross debt-to-GDP ratio increased to 83.2% of GDP in 2015, from 71% of GDP in 2013, on account of stock-flow adjustments and one-off expenditures. The Commission’s 2016 spring forecast projects the gross government debt to have peaked in 2015 and to decrease to 78% of GDP in 2017, due to a reduction in cash buffers. The Council is expected to conclude that Slovenia’s deficit has been corrected.

SOURCE: European Council