Cyprus

VII - Six-Pack

The ‘Six-Pack’ is a package of six legislative measures (five regulations and one directive) improving the Economic governance in the EU. The Commission made the original proposals in September 2010. After negotiations between the Council and the European Parliament, the package was adopted in November 2011 and entered into force on December 13, 2011. Part of the ‘Six-Pack’ measures applies only to the Eurozone member states (see the individual titles below).          
The ‘Six-Pack’ measures reinforce the Stability and Growth Pact (SGP), among others by introducing a new Macroeconomic Imbalances Procedure, new sanctions (for Eurozone member states) and reversed qualified majority voting. Also, there is more attention for the debt-criterion.        
(
http://ec.europa.eu/economy_finance/economic_governance/index_en.htm)

Negotiation
VII.1
What positions did Cyprus adopt in the negotiation of the ‘Six-Pack’, in particular in relation to the implications of the ‘Six-Pack’ for (budgetary) sovereignty, constitutional law
, socio-economic fundamental rights, and the budgetary process.

The transposition of the Six- Pack into the Cypriot legal order was discussed in Parliament on the 12th of December 2012[1], after the Parliamentarian Committee of Finance and Budget had studied the Draft Bill during the period April – December 2012.

The issues that arose in the Parliamentarian Committee of Finance and Budget, where because of the participation of delegators of all parties the discussion is concentrated, pertain mostly to budgetary issues and a new framework of the management of public debt.

Law 194(1) 2012

According to the report of the Committee one of the objectives of the new Law 194(1) 2012 (see Question VII.2) was the regulation of the evaluation of the budgetary danger that is inherent in the granting of guarantees and the assumption of loan agreements by Cyprus.[2] The report submitted by the Parliamentarian Committee further stressed the need for the drafting and implementation of a modernized legal framework for the management of public debt, which could be attained via the institutionalization of the Office of Public Debt Management (Grafeio Diaheirisis Dimosiou Hreous – Γραφείο Διαχείρισης Δημοσίου Χρέους). Such an office would be entrusted with the materialization of the new public debt management, notably the preparation of the annual financial plan, the formulation of the strategies to be followed, the management of cash and the risk assessment of government guarantees and loans.

The debate during the preparation of the Draft Bill focused on the need to make the Office more independent and resistant to political pressures. Some members of the Committee stressed that there is an increased need to allow as much independence as possible to the Office as experience has shown that there is no clear demarcation/separation between the budgetary targets of the state budget and the management of the public debt. Such a lack in earlier years jeopardises the debt sustainability.[3]

Draft Bill

The Draft Bill[4] aimed at producing legislation transposing the Six Pack Directive under which (the Draft Bill), the executive, based on prior commitments to the European Union, must submit to the House of Representatives balanced budgets and not adopt or propose any Draft bill or regulation that would alter the ceiling deficit for 2012, or that would disrupt the (balanced) fiscal balance for the years to come.

The President and the Committee stressed during the plenary session, that the ‘new law’ should acquire ‘constitutional status’, so that it is ensured that the law becomes supreme against any other law, it applies and it cannot get amended or circumvented in the near future by a simple majority, very likely to be formed. The idea behind the granting of ‘constitutional force’ to the law is that no budget that does not fulfill the requirements of the Medium Budgetary Framework can be examined, debated and decided before the Parliament. As such, the Parliament cannot be susceptible to any pressure while deciding on the coming year’s budget.

The main relevant provisions of the Six Pack Directive and Regulation 1466/97/EC were then listed, during the plenary session (relating in particular to the Medium Budgetary Framework, the guarantees and targets, as well as the general budgetary policy of Cyprus).

For that reason the opinion of the Legal Service of the Republic of Cyprus was requested (not publically available, but referred to in the Parliamentary Committee’s report and in the plenary), in order to process the Constitutional amendment which will ensure the aforementioned guarantees and implement the aforementioned provisions. The representative of the Ministry of Finance argued that the aforementioned provisions (relating to the implementation of the Six Pack Framework) in the Draft Bill might raise constitutional problems. The bill/law has not yet entered into force, nor acquired constitutional status.

Directive 2011/85/EU 
Council Directive 2011/85/EU of 8 November 2011 on requirements for budgetary frameworks of the Member States

Implementation   
VII.2
What measures are being taken to implement Directive 2011/85/EU on requirements for budgetary frameworks (required before 31 December 2013, article 15 Directive 2011/85/EU)?

The Cypriot government prepared a draft Bill entitled ‘Law on the Medium-Term Budgetary Framework and Fiscal Rules’ which was submitted to parliament for adoption in mid-2012.

Law 194 (I) of 2012 on the Medium Term Budgetary Framework and the Fiscal Rules (published in the Official Journal of the Cyprus Republic on 21/12/2012[5] implemented Directive 2011/85/EU and provides that the budgetary policy is based, among others, on the adoption of a horizon of multi-year budgetary planning, aiming at maintaining the medium-term budgetary Objective.

Besides the necessary budgetary amendments that had to be incorporated into the yearly budgetary laws, no amendments in national legal sources were necessary, as Article 20 of Law 194 (I) of 2012 provides that the provisions of the law at issue, apply independently of the provisions of any other law, more general or more specific, previous or subsequent laws. As such, although Law 194 (I) of 2012 bears the title of a ‘normal’ Law, in fact it has a special status. According to Art. 19 of the same Law, however, the Ministerial Council is responsible to issue regulations for the better application of the provisions of Law 194 (I) and for the regulation of issues, in particular of a ‘technical nature’.

Implementation difficulties         
VII.3
What political/legal difficulties
did Cyprus encounter in the implementation process, in particular in relation to implications of the directive for (budgetary) sovereignty, constitutional law and the budgetary process?

See Question VII.1.

Macroeconomic and budgetary forecasts   
VII.4
What institution will be responsible for producing macroeconomic and budgetary forecasts (article 4(5) Directive 2011/85/EU)? What institution will conduct an unbiased and comprehensive evaluation of these forecasts (article 4(6) Directive 2011/85/EU)?

According to the preamble of the Law 194 (I) of 2012, the ‘Fiscal Council’ is an independent institution with consultancy/consulting powers that is competent/responsible to evaluate, produce and adopt the macroeconomic and budgetary forecasts. The ‘Fiscal Council’ is to be formed/established pursuing the decision of the Cyprus Ministerial Council, which is formed by all Ministers of the Republic of Cyprus. 

Article 167 of the Cypriot Constitution provides that it is the responsibility of the Minister of Finance to compile the budget for each financial year. After the budget has been approved by the Council of Ministers it is submitted to the House of Parliament where it is discussed, and if approved adopted as a law.

According to Article 12 of Law 194 (I) of 2012, it is the responsibility of the Minister of Finance to ensure that the budgetary planning and the fiscal policy are based on realistic macroeconomic and budgetary forecasts. To this end, the budgetary planning has to be compared to the most recent forecasts of the Commission, and possibly, the forecasts of other independent institutions, like the Central Bank and/or the Fiscal Council.[6] In case there are big differences between the selected macroeconomic scenario and the forecasts of the Commission, they have to be described in a substantiated/justified way.[7]

Fiscal Council   
VII.5
Does Cyprus have in place an independent Fiscal Council (article 6(1) Directive 2011/85/EU: ‘independent bodies or bodies endowed with functional autonomy vis-à-vis the fiscal authorities of the Member States’)? What are its main characteristics? Does Cyprus have to create (or adapt) a Fiscal Council in order to implement Directive 2011/85/EU?

According to the preamble of the Law 194 (I) of 2012, the ‘Fiscal Council’ is an independent institution with consultancy/consulting powers that is responsible to evaluate, produce and adopt the macroeconomic and budgetary forecasts. The ‘Fiscal Council’ is to be formed/established pursuing the decision of the Cyprus Ministerial Council, which is formed by all Ministers of the Republic of Cyprus.

Following the suggestion of the Nobel Laureate in Economics, Christoforos Pissaridis, the current President of Cyprus, Nikos Anastasiades, announced before the presidential elections that he would advocate the creation of a ‘Fiscal Council’ that would in principle ‘control and advise the Government’ with regard to the impact its measures and political decisions might have to the economy. [8]

However, despite this political announcement, no decision of the Council of Ministers has been taken yet, to establish a ‘Fiscal Council’. According to Mr. Panteli, a senior economic officer at the Ministry of Finance of Cyprus, the independent Fiscal Council with three members will be established at the beginning of 2015. The Council will be responsible for overseeing the implementation of fiscal rules, analyzing fiscal policy developments, and evaluating the macro-economic and fiscal forecasts prepared by the government.[9]


Regulation No 1176/2011 on the prevention and correction of macroeconomic imbalances           
(
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32011R1176:EN:NOT)

MEIP difficulties      
VII.6
What political/legal difficulties
did Cyprus encounter and what debates have arisen, in particular about implications of the regulation for (budgetary) sovereignty, constitutional law, socio-economic fundamental rights, and the budgetary process?

No particular political or legal difficulties were encountered outside the general debate on the implications of the six-pack (see question VII.1).            

Regulation No 1175/2011 on strengthening budgetary surveillance positions          
(
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CONSLEG:1997R1466:20111213:EN:PDF)

MTO procedure    
VII.7
What changes to the rules on the budgetary process are made to accommodate the amended Medium-term Budgetary Objective (MTO) Procedure?

The annual Budget Bill has to comply with the Medium-Term Budgetary Framework (MTBF) and the Medium-Term Budgetary Objective (MTO) (Art. 9 of the Law 194 (I) of 2012).

The MTO procedure is described under Art. 5 – 7 of the Law 194 (I) of 2012.  Art. 6 stipulates that the procedures of the MTO are issued by the Minister of Finance under a Ministerial Circular/Regulation

Until 2012 Cyprus was among a handful of Member States that had neither fiscal rules nor a binding Medium-Term Budgetary Framework (MTBF), while it also lacked a fiscal council (see also question 34).[10]  Although Cyprus announced in 2007 that it would introduce a three-year medium-term budgetary framework (MTBF) with the aim to better control public sector employment growth and contain other current expenditures,[11] this budgetary framework was eventually introduced in 2012.

In order to accommodate the new Medium-term Budgetary Objective (MTO) Procedure as provided in Regulation (EU) No 1175/2011 the new ‘Budget Law’ for 2013 (Law 59 (II) of 2012, Art. 5) included special reference to the MTBF 2013-2015 where the horizontal expenses ‘ceilings’ for each Ministry are laid down and cannot be exceeded under any circumstances. [12]

This means that the new Law 194 (I) of 2012 has introduced a new/novel budget procedure which finally incorporates and is based on the MTBF and the MTO. The general procedure of drafting the budget is laid down by the Minister of Finance, in accordance with Art. 167 of the Constitution of Cyprus (see question IX.1).  

European semester     
VII.8
What changes have to be made to the rules and practices on the national budgetary timeline to implement the new rules on a European Semester for economic policy coordination (section 1-A, article 2-a consolidated Regulation 1466/97)?

According to Art. 3(1) of Law 194 (I) of 2012 every Ministry and every Independent Agency have to send to the Minister of Finance (on the date the Minister dictates) the revenue and expenditure forecasts of their Ministry (or Agency) for the next 3 financial years in accordance with the Ministerial Encyclical which sets out the budgetary provisions (always compliant with the MTO and the MTBF).

MTO difficulties
VII.9
What political/legal difficulties
did Cyprus encounter and what debates have arisen, in particular about implications of the regulation for (budgetary) sovereignty, constitutional law and the budgetary process?

Neither political nor legal difficulties were encountered with regard to the implications of Regulation 1175/2011/EU outside the general debate on the six-pack (see question VII.1).

Respect MTO      
VII.10
How is respect of the Medium-term Budgetary Objective included in the national budgetary framework (section 1A, article 2a consolidated Regulation 1466/97)?

Until 2012 Cyprus was among a handful of Member States that had neither fiscal rules nor a binding medium-term budgetary framework (MTBF), while it also lacked a fiscal council.[13] In order to comply with the relevant EU Six-Pack measures (including the amended Regulation 1466/97), the Cypriot government prepared a draft Bill entitled ‘Law on the Medium-Term Budgetary Framework and Fiscal Rules’ which was submitted to parliament for adoption in mid-2012. Law 194 (I) of 2012 on the Medium Term Budgetary Framework and the Fiscal Rules (published in the Official Journal of the Cyprus Republic on 21/12/2012). The new law includes a rolling three-year budget framework with a view of enhancing fiscal discipline.

In consultation with the EC/ECB/IMF, through regulations in the form of an expanded budget circular, Cyprus will ensure that the MTBF will be fully effective starting with the 2014 budget.

Article 9 of Law 194 (I) of 2012 provides that the Law approving the yearly budget (Budget Law) of Cyprus should be construed in accordance with the provisions laid out in the Medium Term Budgetary Framework. In specific, Art. 9 provides that the estimates of income and expenditure as well as the priorities set out in the Medium Term Budgetary Framework should constitute the basis for the preparation of the budget.

Furthermore, Art. 13 (6) of Law 194 (I) of 2012 provides that (Cyprus’) fiscal policy is premised on the following fiscal rules:

a)     The fiscal position of the government has to be balanced or in surplus: It is deemed that this (provision) is ensured if the yearly structural balance of the government corresponds to the specific medium-term budgetary objective, as set out in the Stability and Growth Pact, by setting the lower limit for the structural deficit to 0.5% of Gross Domestic Product at market prices.

b)    compliance with the reference values ​​for the ceilings of the budget deficit and the public debt of the general government at 3% of Gross Domestic Product and 60% of the Gross Domestic Product respectively.

c)     the adoption of a multiannual fiscal planning horizon, aimed at keeping the medium-term budgetary objectives.[14]

 In the context of a broad review of the Cypriot Public Finance Management (PFM) system which was completed in late June 2013, the Cypriot government is planning to develop a new comprehensive Law on Fiscal Responsibility and Budget Systems including supplementary secondary legislation to address any remaining inconsistencies between the MTBF law and existing legislation, which will be submitted to parliament by end-December 2013 (structural benchmark).[15] The law is expected to be submitted for discussion in the Parliament by the end of December 2013 (see also question 88).

Until now in order to meet the MTBO, there have been several ‘spending cuts’ in the 2012 and 2013 budgets. These cuts have been implemented through ‘amending’ Laws (of the main Budgetary (yearly) law) such as (Amending of the Budget Law) Law 2 (II) of 2013, 3 (II) of 2013 (as published in the Official Gazette of the Republic of Cyprus Issue 4231/ 1 February 2013), (Amending of the Budget Law) Law 22 (II) of 2013 (as published in the Official Gazette of the Republic of Cyprus Issue 4238/ 30 April 2013), (Amending of the Budget Law) Law 29 (II) of 2012 (as published in the official Gazette of the Republic of Cyprus Issue 4212/ 6 April 2012).

Current MTO     
VII.11
What is Cyprus’ current Medium-term Budgetary Objective (section 1A, article 2a consolidated Regulation 1466/97)? When will it be revised?

Since Cyprus is under financial assistance, the MoU sets as an objective for Cyprus the emergence of primary deficit up to 2.4% of GDP for 2013, whereas the Medium-Term Objective sets as a primary objective the achievement of a primary surplus of 4% of GDP until 2017.[16]

Adoption MTO   
VII.12
By what institution and through what procedure is Cyprus’ Medium-term Budgetary Objective adopted and incorporated in the stability programme (Eurozone, article 3(2)(a) consolidated Regulation 1466/97)?

The Medium-term Budgetary Objective (MTBO) is adopted and incorporated in the stability programme by the Minister of Finance.

According to Art. 5 (1) of Law 194 (I) the Minister of Finance drafts an efficient Medium-Term Budgetary Framework (MTBF) which guarantees the adoption of a national fiscal planning for at least three years. According to Art. 6 of the same law the procedures included in the MTBF pertain to, among other issues, the MTBO which are defined in an Encyclical of the Minister of Finance. In case of no compliance the Automatic Correction mechanism is set off as provided under Art. 14 of the same law.

Regulation No 1177/2011 on the excessive deficit procedure
(
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CONSLEG:1997R1467:20111213:EN:PDF)

EDP difficulties  
VII.13
What political/legal difficulties
did Cyprus encounter and what debates have arisen, in particular about implications of the regulation for (budgetary) sovereignty, constitutional law and the budgetary process?

Neither political nor legal difficulties were encountered with regard to the implications of Regulation 1177/2011/EU outside the general debate on the six-pack (see question VII.1).

Regulation No 1173/2011 on effective enforcement of budgetary surveillance    
(
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32011R1173:EN:NOT)

Sanctions
VII.14
What political/legal difficulties
did Cyprus encounter and what debates have arisen, in particular about implications of the regulation for (budgetary) sovereignty, constitutional law and the budgetary process?

Neither political nor legal difficulties were encountered with regard to the Regulation 1173/2011 outside the general debate on the six-pack (see question VII.1).

General changes  
VII.15
What further changes have to be made to the rules on the budgetary process in order to comply with the Six-Pack rules?

No further changes are needed in order to comply with the six-pack rules.

Miscellaneous
VII.16
What other information is relevant with regard to Cyprus and the Six-Pack?

In view of the very recent developments in Cyprus, the Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding (MoU) signed by Cyprus on 29 April 2013 precipitates the structural and institutional changes. The MoU thus provides for the important changes to be undertaken within the 2nd and 3rd quarters of 2013. With regard to the budgetary framework the measures to be implemented include:

‘The  establishment  of  a  Fiscal  Council  with  a  statutory  regime,  functions, nomination procedures for its governing body and funding arrangements grounded in law by Q2-2013; complete  the  adoption  of  the  law  transposing  Council  Directive  2011/85/EU  on requirements for budgetary frameworks, and provisions pertaining to the fiscal compact of the Treaty on Stability, Coordination and Governance (TSCG) on the basis of the Common Principles  for  national  fiscal  correction  mechanisms  laid  down  in  Commission Communication  COM(2012)342,  with  implementing  texts  ensuring  that  adopted  measures are fully effective by Q2-2013. In particular, integrate the presentation of the existing multi-annual  budgetary  objectives  (MoU  fiscal  targets  and  the  rolling  three-year  expenditure ceilings)  into  a  comprehensive  Fiscal  Strategy  Statement  in  compliance  with  MTBF requirements  in  the  sense  of  Directive  2011/85/EU  to  guide  the  preparation  of  the  2014 budget by Q2-2013; and submit to the House of Representatives a draft high-level Fiscal Responsibility and Budget System  Law  applicable  to  the  entire  general  government  sector.  The draft  law  will encompass, inter alia, macro-fiscal policy-making, and budget formulation and approval. It will address remaining gaps and inconsistencies and codify existing good budget practices by Q4-2013.’[17]

[3] The reference to previous years is made because in previous years the management of public debt was conducted by the (independent) Central Bank of Cyprus. This responsibility was however transferred to the Ministry of Finance.

[4] See: http://www2.parliament.cy/parliamentgr/008_01_01/008_01_IB.htm under 12-12-2012.

[6] Art. 12 of Law 194 (I) of 2012 (under γ)

[7] Art. 12 of Law 194 (I) of 2012 (under δ).

 

w.mof.

gov.cy/mof/mof.nsf/All/8D5A50938A96AA6BC2257BA20035E774/$file/%CE%91%CF%81%CE%B8%CF%81%CE%BF%20%CE%93.pdf, p. 2

[13] Fiscal Frameworks across Member States. Commission Services Country Fiches from the 2011 EPC Peer Review’, Occasional papers 91, February 2012, p. 9.

[14] Free translation Art. 13 (6) of Law 194 (I) of 2012.

[15] «The Economic Adjustment Programme for Cyprus», Occasional Papers 149, May 2013, p. 144 and G. Panteli, A New PFM Reform Strategy for Cyprus, http://www.mof.gov.cy/mof/mof.nsf/All/8D5A50938A96AA6BC2257BA20035E774/$file/%CE%91%CF%81%CE%B8%CF%81%CE%BF%20%CE%93.pdf

[17] Memorandum of Understanding on Specific Economic Policy Conditionality, version of 12 April 2013.