Henstilling med henblik på RÅDETS HENSTILLING om Cyperns økonomiske, sociale, beskæftigelsesmæssige, strukturelle og budgetmæssige politikker

EN EN
EUROPEAN
COMMISSION
Brussels, 4.6.2025
COM(2025) 213 final
Recommendation for a
COUNCIL RECOMMENDATION
on the economic, social, employment, structural and budgetary policies of Cyprus
{SWD(2025) 213 final}
Offentligt
KOM (2025) 0213 - Henstilling
Europaudvalget 2025
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Recommendation for a
COUNCIL RECOMMENDATION
on the economic, social, employment, structural and budgetary policies of Cyprus
THE COUNCIL OF THE EUROPEAN UNION,
Having regard to the Treaty on the Functioning of the European Union, and in particular
Article 121(2) and Article 148(4) thereof,
Having regard to Regulation (EU) 2024/1263 of the European Parliament and of the Council
of 29 April 2024 on the effective coordination of economic policies and on multilateral
budgetary surveillance and repealing Council Regulation (EC) No 1466/971
, and in particular
Article 3(3) thereof,
Having regard to Regulation (EU) No 1176/2011 of the European Parliament and of the
Council of 16 November 2011 on the prevention and correction of macroeconomic
imbalances2
, and in particular Article 6(1) thereof,
Having regard to the recommendation of the European Commission,
Having regard to the resolutions of the European Parliament,
Having regard to the conclusions of the European Council,
Having regard to the opinion of the Employment Committee,
Having regard to the opinion of the Economic and Financial Committee,
Having regard to the opinion of the Social Protection Committee,
Having regard to the opinion of the Economic Policy Committee,
Whereas:
General considerations
(1) Regulation (EU) 2024/1263, which entered into force on 30 April 2024, specifies the
objectives of the economic governance framework, which aims at promoting sound
and sustainable public finances and sustainable and inclusive growth and resilience
through reforms and investments, and preventing excessive government deficits. The
Regulation stipulates that the Council and the Commission conduct multilateral
surveillance in the context of the European Semester in accordance with the objectives
and requirements set out in the TFEU. The European Semester includes, in particular,
1
OJ L, 2024/1263, 30.4.2024, ELI: http://data.europa.eu/eli/reg/2024/1263/oj.
2
OJ L 306, 23.11.2011, p. 25, ELI: http://data.europa.eu/eli/reg/2011/1176/oj.
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the formulation, and the surveillance of the implementation of country-specific
recommendations. The Regulation also promotes national ownership of fiscal policy
and emphasises its medium-term focus, combined with more effective and coherent
enforcement. Each Member State must submit to the Council and the Commission a
national medium-term fiscal-structural plan, containing its fiscal, reform and
investment commitments, over 4 or 5 years, depending on the length of the national
legislative term. The net expenditure3
path in these plans has to comply with the
Regulation’s requirements, including the requirements to put or keep general
government debt on a plausibly downward path by the end of the adjustment period, or
for it to remain at prudent levels below 60% of gross domestic product (GDP), and to
bring and/or maintain the general government deficit below the 3%-of-GDP Treaty
reference value over the medium term. Where a Member State commits to a relevant
set of reforms and investments in accordance with the criteria set out in the
Regulation, the adjustment period may be extended by up to three years.
(2) Regulation (EU) 2021/241 of the European Parliament and of the Council4
, which
established the Recovery and Resilience Facility (the ‘RRF’), entered into force on
19 February 2021. The RRF provides financial support to Member States for
implementing reforms and investments, delivering a fiscal impulse financed by the
Union. In line with the priorities of the European Semester for economic policy
coordination, the RRF fosters economic and social recovery while driving sustainable
reforms and investments, in particular promoting the green and digital transitions and
making Member States’ economies more resilient. It also helps strengthen public
finances and boost growth and job creation in the medium and long term, improve
territorial cohesion within the Union and support the continued implementation of the
European Pillar of Social Rights.
(3) Regulation (EU) 2023/435 of the European Parliament and of the Council5
(the
‘REPowerEU Regulation’), which was adopted on 27 February 2023, aims to phase
out the Union’s dependence on Russian fossil-fuel imports. This helps achieve energy
security and diversify the Union’s energy supply, while increasing the uptake of
renewables, energy storage capacities and energy efficiency. Cyprus added a new
REPowerEU chapter to its national recovery and resilience plan in order to finance key
reforms and investments that will help achieve the REPowerEU objectives.
(4) On 17 May 2021, Cyprus submitted its national recovery and resilience plan to the
Commission, in accordance with Article 18(1) of Regulation (EU) 2021/241. Pursuant
to Article 19 of that Regulation, the Commission assessed the relevance, effectiveness,
efficiency and coherence of the recovery and resilience plan, in accordance with the
3
Net expenditure as defined in Article 2, point (2), of Regulation (EU) 2024/1263: ‘net expenditure’
means government expenditure net of (i) interest expenditure; (ii) discretionary revenue measures; (iii)
expenditure on programmes of the Union fully matched by revenue from Union funds; (iv) national
expenditure on co-financing of programmes funded by the Union; (v) cyclical elements of
unemployment benefit expenditure; and (vi) one-offs and other temporary measures.
4
Regulation (EU) 2021/241 of the European Parliament and of the Council of 12 February 2021
establishing the Recovery and Resilience Facility (OJ L 57, 18.2.2021, p. 17, ELI:
http://data.europa.eu/eli/reg/2021/241/oj).
5
Regulation (EU) 2023/435 of the European Parliament and of the Council of 27 February 2023
amending Regulation (EU) 2021/241 as regards REPowerEU chapters in recovery and resilience plans
and amending Regulations (EU) No 1303/2013, (EU) 2021/1060 and (EU) 2021/1755, and Directive
2003/87/EC (OJ L 63, 28.2.2023, p. 1, ELI: http://data.europa. eu/eli/reg/2023/435/oj).
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assessment guidelines set out in Annex V. On 20 July 2021, the Council adopted its
Implementing Decision approving the assessment of the recovery and resilience plan
for Cyprus6
, which was amended under Article 18(2) on 8 December 2023 to update
the maximum financial contribution for non-repayable financial support, as well as to
include the REPowerEU chapter7
. The release of instalments is conditional on the
adoption of a decision by the Commission, in accordance with Article 24(5), stating
that Cyprus has satisfactorily achieved the relevant milestones and targets set out in
the Council Implementing Decision. Satisfactory achievement requires that the
achievement of preceding milestones and targets for the same reform or investment
has not been reversed.
(5) On 21 January 2025, the Council, upon the recommendation of the Commission,
adopted a recommendation endorsing the national medium-term fiscal-structural plan
of Cyprus8
. The plan was submitted in accordance with Article 11 and Article 36(1),
point (a), of Regulation (EU) 2024/1263, covers the period from 2025 until 2028 and
presents a fiscal adjustment spread over four years.
(6) On 26 November 2024, the Commission adopted an opinion on the 2025 draft
budgetary plan of Cyprus. On the same date, on the basis of Regulation (EU) No
1176/2011, the Commission adopted the 2025 Alert Mechanism Report, in which it
identified Cyprus as one of the Member States for which an in-depth review would be
needed. The Commission also adopted a recommendation for a Council
recommendation on the economic policy of the euro area and a proposal for the 2025
Joint Employment Report, which analyses the implementation of the Employment
Guidelines and the principles of the European Pillar of Social Rights. The Council
adopted the Recommendation on the economic policy of the euro area9
on 13 May
2025 and the Joint Employment Report on 10 March 2025.
(7) On 29 January 2025, the Commission published the Competitiveness Compass, a
strategic framework that aims to boost the EU’s global competitiveness over the next
five years. It identifies the three transformative imperatives of sustainable economic
growth: (i) innovation; (ii) decarbonisation and competitiveness; and (iii) security. To
close the innovation gap, the EU aims to foster industrial innovation, support the
growth of start-ups through initiatives like the EU Start-up and Scale-up Strategy, and
promote the adoption of advanced technologies like artificial intelligence and quantum
computing. In pursuit of a greener economy, the Commission has outlined a
comprehensive Affordable Energy Action Plan and a Clean Industrial Deal, ensuring
that the shift to clean energy remains cost-effective, competitiveness-friendly,
particularly for energy-intensive sectors, and is a driver for growth. To reduce
excessive dependencies and increase security, the Union is committed to strengthening
global trade partnerships, diversifying supply chains and securing access to critical
raw materials and clean energy sources. These priorities are underpinned by horizontal
enablers, namely regulatory simplification, deepening of the single market, financing
6
Council Implementing Decision of 20 July 2021 on the approval of the assessment of the recovery and
resilience plan for Cyprus (10686/2021).
7
Council Implementing Decision of 8 December 2023 amending the Implementing Decision of 20 July
2021 on the approval of the assessment of the recovery and resilience plan for Cyprus (15571/2024).
8
Council Recommendation of 21 January 2025 endorsing the medium-term fiscal-structural plan of
Cyprus, OJ C/2025/10/2.
9
Council Recommendation of 13 May 2025 on the economic policy of the euro area (OJ C,
C/2025/2782, 13.05.2025, ELI: http:// data.europa.eu/eli/C/2025/2782/oj).)
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competitiveness and a Savings and Investments Union, promotion of skills and quality
jobs, and better coordination of EU policies. The Competitiveness Compass is aligned
with the European Semester, ensuring that Member States’ economic policies are
consistent with the Commission’s strategic objectives, creating a unified approach to
economic governance that fosters sustainable growth, innovation and resilience across
the Union.
(8) In 2025, the European Semester for economic policy coordination continues to
develop alongside the implementation of the RRF. The full implementation of the
recovery and resilience plans remains essential for delivering on the policy priorities
under the European Semester, as the plans help effectively address all or a significant
subset of challenges identified in the relevant country-specific recommendations
issued in recent years. The country-specific recommendations remain equally relevant
for the assessment of amended recovery and resilience plans in accordance with
Article 21 of Regulation (EU) 2021/241.
(9) The 2025 country-specific recommendations cover the key economic policy
challenges that are not sufficiently addressed by measures included in the recovery and
resilience plans, taking into account the relevant challenges identified in the 2019-
2024 country-specific recommendations.
(10) On 4 June 2025, the Commission published the 2025 country report for Cyprus. It
assessed Cyprus’s progress in addressing the relevant country-specific
recommendations and took stock of Cyprus’s implementation of the recovery and
resilience plan. Based on this analysis, the country report identified the most pressing
challenges Cyprus is facing. It also assessed Cyprus’s progress in implementing the
European Pillar of Social Rights and in achieving the Union headline targets on
employment, skills and poverty reduction, as well as progress in achieving the United
Nations Sustainable Development Goals.
(11) The Commission carried out an in-depth review under Article 5 of Regulation (EU)
No 1176/2011 for Cyprus. The main findings of the Commission’s assessment of
macroeconomic vulnerabilities for Cyprus for the purposes of that Regulation were
published on 13 May 202510
. On 4 June 2025, the Commission concluded that Cyprus
is no longer experiencing macroeconomic imbalances. In particular, vulnerabilities
relating to external and private debt are receding, in part on account of strong
economic growth, and government debt reduction is further supported by continued
budgetary surpluses; the current account deficit remains sizeable. Cyprus has made
important progress in implementing measures that address its vulnerabilities.
Household and non-financial corporate debt have been falling as a share of GDP,
predominantly thanks to strong denominator effects on account of high nominal GDP
growth. A large share of corporate debt is owed by special purpose entities, whose
lenders are located outside of Cyprus, and which pose limited risks to the economy.
Additionally, non-performing loans held by banks has been declining significantly due
to sales, write offs and repayments. Non-performing loans held by credit-acquiring
companies are also decreasing leading to further deleveraging. The government debt is
decreasing at a fast pace and Cyprus is forecast to sustain budgetary surpluses. Despite
declining in 2024, the current account deficit remains elevated and is expected to
improve only marginally; the negative net international investment position remains
10
SWD(2025) 68 final.
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sizeable but is significantly inflated due to the presence of special purpose entities
without significant direct links to the domestic economy. Cyprus is making policy
progress to address its vulnerabilities. In particular, the foreclosure framework became
fully operational in 2024, and legislation aiming to facilitate the non-performing loans
resolution is expected to ease household indebtedness and boost their savings.
Assessment of the Annual Progress Report
(12) On 21 January 2025 the Council recommended the following maximum growth rates
of net expenditure for Cyprus: 6.0% in 2025, 5.0% in 2026, 5.4% in 2027, and 4.3% in
2028, which correspond to the maximum cumulative growth rates calculated by
reference to 2023 of 8.9% in 2025, 14.3% in 2026, 20.5% in 2027, and 25.7% in 2028.
On 30 April 2025 Cyprus submitted its Annual Progress Report11
, on adherence to the
recommended maximum growth rates of net expenditure and the implementation of
reforms and investments responding to the main challenges identified in the European
Semester country-specific recommendations. The Annual Progress Report also reflects
Cyprus’s biannual reporting on the progress made in achieving its recovery and
resilience plan in accordance with Article 27 of Regulation (EU) 2021/241.
(13) Russia’s war of aggression against Ukraine and its repercussions constitute an
existential challenge for the European Union. The Commission recommended to
activate the national escape clause of the Stability and Growth Pact in a coordinated
manner to support the EU efforts to achieve a rapid and significant increase in defence
spending and this proposal was welcomed by the European Council of 6 March 2025.
(14) Based on data validated by Eurostat 12
, Cyprus’s general government surplus increased
from 1.7% of GDP in 2023 to 4.3% in 2024, while the general government debt fell
from 73.6% of GDP at the end of 2023 to 65.0% at the end of 2024. According to the
Commission’s calculations, these developments correspond to a net expenditure
growth rate of 2.9% in 2024. In the Annual Progress Report, Cyprus estimates the net
expenditure growth in 2024 at 3.2%. The Commission estimates that the net
expenditure growth was lower than in the Annual Progress Report. The difference
between the Commission’s calculations and the estimates of national authorities is due
to lower total expenditure and higher deductions for the national co-financing of EU
programmes, reflecting more recent available data13
. Based on the Commission’s
estimates, the fiscal stance14
, which includes both nationally and EU financed
expenditure, was contractionary, by 1.9% of GDP, in 2024.
(15) According to the Annual Progress Report, the macroeconomic scenario underpinning
the budgetary projections by Cyprus expects real GDP growth at 3.1% in both 2025
11
The 2025 Annual Progress Reports are available on: https://economy-finance.ec.europa.eu/economic-
and-fiscal-governance/stability-and-growth-pact/preventive-arm/annual-progress-reports_en
12
Eurostat-Euro Indicators, 22.4.2025.
13
The Commission figures for 2024 are based on outturn data in line with the April 2025 fiscal
notification, while national authorities rely on earlier data.
14
The fiscal stance is defined as a measure of the annual change in the underlying budgetary position of
the general government. It aims to assess the economic impulse stemming from fiscal policies, both
those that are nationally financed and those that are financed by the EU budget. The fiscal stance is
measured as the difference between (i) the medium-term potential growth and (ii) the change in primary
expenditure net of discretionary revenue measures and including expenditure financed by non-repayable
support (grants) from the Recovery and Resilience Facility and other Union funds.
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and 2026, while HICP inflation is projected at 1.9% in 2025 and 2.1% in 2026. The
Commission Spring 2025 Forecast projects real GDP to grow by 3.0% in 2025 and
2.5% in 2026, and HICP inflation to stand at 2.0% in both 2025 and 2026.
(16) In the Annual Progress Report, the general government surplus is expected to decrease
to 3.5% of GDP in 2025, while the general government debt-to-GDP ratio is set to
decrease to 57.4% by the end of 2025. These developments correspond to net
expenditure growth of 6.8% in 2025. The Commission Spring 2025 Forecast projects a
government surplus of 3.5% of GDP in 2025. According to the Commission’s
calculations, these developments correspond to net expenditure growth of 7.3% in
2025. These higher projections of net expenditure growth than in the Annual Progress
Report are due to the Commission expecting a slightly stronger increase of net
expenditure growth in 2025, although starting from a lower base. Based on the
Commission’s estimates, the fiscal stance, which includes both nationally and EU
financed expenditure, is projected to be expansionary, by 1.1% of GDP, in 2025. The
general government debt-to-GDP ratio is set to decrease to 58.0% by the end of 2025.
The decrease of the debt-to-GDP ratio in 2025 mainly reflects the high government
surplus together with solid economic growth.
(17) General government expenditure amounting to 1.1% of GDP is expected to be
financed by non-repayable support (“grants”) from the Recovery and Resilience
Facility in 2025, compared to 0.4% of GDP in 2024, according to the Commission
Spring 2025 Forecast. Expenditure financed by Recovery and Resilience Facility non-
repayable support enables high-quality investment and productivity-enhancing reforms
without a direct impact on the general government balance and debt of Cyprus.
(18) General government defence expenditure in Cyprus amounted to 1.7% of GDP in
2021, 1.5% of GDP in 2022 and 1.9% of GDP in 2023 15
. According to the
Commission Spring 2025 Forecast, expenditure on defence is projected at 1.4% of
GDP in both 2024 and 2025. This corresponds to a decrease of 0.3 percentage points
of GDP compared to 2021.
(19) According to the Commission Spring 2025 Forecast, net expenditure in Cyprus is
projected to grow by 7.3% in 2025 and 10.4% cumulatively in 2024 and 2025. Based
on the Commission Spring 2025 Forecast, the net expenditure growth of Cyprus in
2025 is projected to be above the recommended maximum growth rate, corresponding
to a deviation16
of 0.5% of GDP in annual terms. When considering 2024 and 2025
together, the cumulative growth rate of net expenditure is also projected to be above
the recommended maximum growth rate, corresponding to a deviation of 0.5% of
GDP. The projected deviation exceeds the 0.3% of GDP threshold for the annual
deviation but does not exceed the 0.6% of GDP threshold for the cumulative deviation.
Overall, this means there is a risk of deviation from the recommended maximum net
expenditure growth, when outturn data for 2025 will be available next spring.
(20) In the Annual Progress Report, the general government surplus is projected to increase
to 3.7% of GDP in 2026, while the general government debt-to-GDP ratio is projected
to decrease to 52.6% by the end of 2026. After 2026, in the Annual Progress Report,
15
Eurostat, government expenditure by classification of functions of government (COFOG).
16
From 2026 these figures will appear in the control account that is established in Article 22 of the
Regulation (EU) 2024/1263.
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the general government surplus is projected to remain at 3.7% of GDP in 2027 and
2028. In turn, after 2026, the general government debt-to-GDP ratio is projected to
decrease to 48.4% in 2027, and to 43.3% in 2028. Based on policy measures known at
the cut-off date of the forecast, the Commission Spring 2025 Forecast projects a
general government surplus of 3.4% of GDP in 2026. These developments correspond
to net expenditure growth of 5.4% in 2026. Based on the Commission’s estimates, the
fiscal stance, which includes both nationally and EU financed expenditure, is projected
to be contractionary, by 0.6% of GDP, in 2026. The general government debt-to-GDP
ratio is projected by the Commission to decrease to 51.9% by the end of 2026. The
decrease of the debt-to-GDP ratio in 2026 mainly reflects the high government surplus
together with solid economic growth.
Key policy challenges
(21) In accordance with Article 19(3), point (b), of Regulation (EU) 2021/241 and criterion
2.2 of Annex V to that Regulation, the recovery and resilience plan includes an
extensive set of mutually reinforcing reforms and investments to be implemented by
2026. These are expected to help effectively address all or a significant subset of
challenges identified in the relevant country-specific recommendations. Within this
tight timeframe, finalising the effective implementation of the recovery and resilience
plan including the REPowerEU chapter, is essential to boost Cyprus’s long-term
competitiveness through the green and digital transitions, while ensuring social
fairness. To deliver on the commitments of the recovery and resilience plan by August
2026, it is essential for Cyprus to accelerate the implementation of reforms and
investments by addressing relevant challenges. Cyprus should increase its
administrative capacity to effectively oversee the implementation of the recovery and
resilience plan, expedite investment execution, and sustain progress in implementing
key reforms. The systematic involvement of local and regional authorities, social
partners, civil society and other relevant stakeholders remains essential in order to
ensure broad ownership for the successful implementation of the recovery and
resilience plan.
(22) The implementation of the cohesion policy programme, which encompasses support
from the European Regional Development Fund (ERDF), the Just Transition Fund
(JTF), the European Social Fund Plus (ESF+) and the Cohesion Fund (CF), has
accelerated in Cyprus. It is important to continue efforts to ensure the swift
implementation of this programme, while maximising its impact on the ground.
Cyprus is already taking action under its cohesion policy programme to boost
competitiveness and growth. At the same time, Cyprus continues to face challenges,
including rising temperatures and drought risks, which are placing increased strain on
water supply and critical infrastructure, as well as labour shortages and skills
mismatches. In accordance with Article 18 of Regulation (EU) 2021/1060, Cyprus is
required – as part of the mid-term review of the cohesion policy funds – to review its
programme taking into account, among other things, the challenges identified in the
2024 CSRs. The Commission proposals adopted on 1 April 202517
extend the deadline
for submitting an assessment of the outcome of the mid-term review beyond 31 March
2025. It also provides flexibilities to help speed up programme implementation and
17
Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL
amending Regulations (EU) 2021/1058 and (EU) 2021/1056 as regards specific measures to address
strategic challenges in the context of the mid-term review – COM (2025) 123 final.
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incentives for Member States to allocate cohesion policy resources to five strategic
priority areas of the Union, namely competitiveness in strategic technologies, defence,
housing, water resilience and energy transition.
(23) The Strategic Technologies for Europe Platform (STEP) provides the opportunity to
invest in a key EU strategic priority by strengthening the EU’s competitiveness. STEP
is channelled through 11 existing EU funds. Member States can also contribute to the
InvestEU programme supporting investments in priority areas. Cyprus could use these
initiatives to support the development or manufacturing of critical technologies,
including clean and resource-efficient technologies.
(24) Beyond the economic and social challenges addressed by the recovery and resilience
plan and other EU funds, Cyprus faces several additional challenges related to research
and innovation, access to finance, business environment, energy transition, climate
change adaptation, skills mismatches and labour shortages.
(25) Public and private R&D investment in Cyprus remains among the lowest in the EU,
with public R&D intensity stagnating at 0.29% of GDP in 2023 (EU average: 0.72%)
and business R&D dropping to 0.28% – five times below the EU average. This stems
from structural factors such as a service-based economy, a limited number of large
businesses, an underdeveloped private equity market and a small budget for
incentives. Despite low funding, Cyprus has strong scientific output, but
commercialisation is weak, with only 0.7 patent applications per EUR 1 billion of
GDP in 2022 (EU average: 3.2). The innovation ecosystem is fragmented, with poor
linkages between universities, start-ups, government, and the financial sector. The
number of science, technology, engineering and mathematics (STEM) graduates is
declining, and researcher density remains low. The current research and innovation
strategy lacks targets and indicators, a monitoring and evaluation mechanism, impact
assessments, and long-term funding, and there is a need to improve the legal
framework for commercialisation and high-risk venture capital.
(26) A well-functioning and diversified financial system is essential to boost investment,
innovation, and economic resilience. In Cyprus, access to alternative saving and
investment instruments remains limited, and capital markets are insufficiently
developed. The banking sector is robust, but non-bank financing remains
underutilised, and households’ reliance on traditional bank deposits persists, hindering
the flow of capital into more productive investments. Financial literacy levels are still
low compared to the EU average, constraining households’ ability and motivation to
engage in diversified investment strategies. Furthermore, the limited presence of
institutional investors and venture capital hampers the funding opportunities available
to innovative firms and start-ups.
(27) As set in the Competitiveness Compass, all the EU, national, and local institutions
must make a major effort to produce simpler rules and to accelerate the speed of
administrative procedures. The Commission has set ambitious goals for reducing
administrative burden: by at least 25% and by at least 35% for SMEs; and has created
new tools to achieve these goals, including systematic stress test of the stock of EU
legislation and enhanced stakeholders’ dialogue. To match this ambition, Cyprus also
needs to take action. 68% of businesses consider the complexity of administrative
procedures to be a problem for their company when doing business in Cyprus18
. A
18
‘Businesses' attitudes towards corruption in the EU’ Flash Report, Eurobarometer Report (April 2024).
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business-friendly regulatory environment is essential to boost investment, innovation
and entrepreneurship. Cyprus has made progress in improving its business
environment, including reforms to simplify business registration and a reduction in
late payments in business-to-business and government-to-business transactions. At the
same time, regulatory and administrative barriers remain significant. Complex
licensing and permitting procedures, high tax compliance costs for small to medium-
sized enterprises, and barriers to competition in retail and professional services
continue to weigh on business dynamism.
(28) The governance of state-owned enterprises (SOEs) continues to fall short of
international standards, with shortcomings in areas such as ownership policies and
financial transparency. Cyprus has recently set up an Advisory Council for the
nomination of SOEs board members and has adopted measures to improve financial
oversight. Nevertheless, the absence of mandatory reporting obligations and a
comprehensive inventory of public entities hinders effective monitoring. This also
leads to concerns related to governance, accountability and the quality and pricing of
services in sectors predominantly controlled by SOEs, such as the electricity sector. To
address these challenges, it is essential to create a regularly updated inventory of
public entities and adopt a coordinated reform approach involving all stakeholders.
This should include the development of a clear SOE ownership policy that defines the
roles, responsibilities and accountability of institutions overseeing SOEs.
(29) Cyprus has continued to advance its energy transition, in particular by increasing its
renewable energy production. However, oil and petroleum products still account for a
major part of energy consumption and the country needs to further accelerate the
phase-out of fossil fuels across all sectors. This continued fossil fuel use poses a
significant challenge to reducing overall GHG emissions and to meeting Cyprus’s
2030 target under the Effort Sharing Regulation. Energy isolation persists and needs to
be overcome by expediting the Great Sea Interconnector project, which has been beset
by delays. It is necessary to expand and upgrade Cyprus’s electricity system and grid
and particularly energy storage systems for renewable energy. Developing renewable
energy storage systems is vital for increasing renewable energy capacity in the
transmission network and for reducing energy curtailment. Sustainable and affordable
transport remains a priority, as Cyprus’s transport sector faces rising energy use, full
reliance on road freight, and limited incentives and infrastructure for fleet
electrification. The country’s high dependence on energy imports exacerbates external
sector vulnerabilities. A deeper integration of renewables into the energy mix would
strengthen the economy’s resilience to external energy shocks and make the country
more attractive for productive foreign investment. Cyprus needs to scale up its efforts
in leveraging private financing for energy efficiency improvements and renovations,
especially of worst-performing buildings exposing vulnerable consumers to energy
poverty, among others, by encouraging its financial institutions to participate in the
European Energy Efficiency Financing Coalition.
(30) Energy poverty and affordable electricity is a pressing issue in Cyprus even though
targeted support measures have been implemented. Cyprus is among the countries
with the highest household electricity prices in the EU, placing in particular vulnerable
consumers under considerable financial pressure. Both arrears on utility bills and
structural problems like leaks and damp are still widespread. High cooling costs also
place a significant burden on households.
(31) Cyprus is confronted with significant environmental challenges, particularly
concerning water scarcity and waste management. In 2022, water exploitation reached
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a critical level, reflecting severe overuse of renewable water resources. Agriculture,
consuming 88% of the nation’s water, worsens the issue with outdated irrigation and
limited use of water-saving technologies. Cyprus faces a significant shortfall in water
infrastructure investment, with major needs in drinking water and waste water
treatment. Despite efforts through the 2021-2027 Circular Economy Action Plan and
the recovery and resilience plan, the circular material use rate and resource
productivity are still below the EU average. In 2022, Cyprus recycled just 15% of
municipal and 70% of packaging waste, while generating the most food waste per
person in the EU and above-average volumes of municipal waste. A landfill charge
under the recovery and resilience plan could improve waste management if properly
enforced.
(32) Cyprus is increasingly vulnerable to climate risks, including wildfires, irregular
rainfall, droughts and storms. Despite planned investments, Cyprus’s resources for
climate adaptation fall short compared to EU averages. The national adaptation
strategy aims to increase resilience, focusing on sustainable water management and
coastal protection, but the approach remains largely non-binding. Strengthening
governance and boosting cooperation among ministries and local authorities are
critical steps to effectively implement climate adaptation measures and for Cyprus to
improve its climate resilience and align more closely with EU standards.
(33) Cyprus’s employment performance has been strong, but labour and skills shortages
increasingly constrain economic development. Key sectors such as construction,
energy, healthcare, agriculture and hospitality face acute shortages, which are further
exacerbated by skills mismatches and an underutilised workforce. Additionally, the
share of young people not in employment, education or training (12.9%) is still higher
than the EU average, especially for young women. Cyprus is also facing a significant
decline in basic skills attainment among young people – marked by the largest rise in
underachievement in the EU since 2018 – due to factors such as limited participation
in early childhood education, incomplete policy implementation, and low school
autonomy. This poses a major barrier to reskilling efforts. Participation in secondary
vocational education and training (VET) remains limited, while work-based learning
opportunities and alignment with labour market needs are insufficient. The share of
students enrolled in STEM fields is the lowest in the EU, contributing to persistent
shortages in critical areas for the green and digital transitions. Furthermore, digital
skills among the working-age population are still low, particularly among vulnerable
groups, and adult participation in learning has significantly declined. Reforms
supported by the Recovery and Resilience Facility and the European Social Fund Plus
are under way – such as the implementation of individual learning accounts, e-skills
programmes, and curriculum updates – but their full impact has yet to materialise.
(34) Access to long-term care services for older people remains limited and public
spending is among the lowest in the EU. The proportion of people aged 65 and over
who require long-term care due to severe difficulties with personal care or household
activities, is one of the highest in the EU, at 34.3%. The increasing share of the
population aged 65 and over will result in even higher demand for long-term care in
the years to come. Access challenges are compounded by shortages of workers, driven
by low wages and low coverage of collective bargaining. To improve the availability,
access to, and quality of services, Cyprus could introduce an integrated long-term care
model, incorporating a robust quality assurance mechanism for all forms of long-term
care.
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(35) In view of the close interlinkages between the economies of euro-area Member States
and their collective contribution to the functioning of the economic and monetary
union, in 2025, the Council recommended that the euro-area Member States take
action, including through their recovery and resilience plans, to implement the 2025
Recommendation on the economic policy of the euro area. For Cyprus,
recommendations (2), (3) and (5) help implement the first euro-area recommendation
on competitiveness, while the recommendations (4) and (5) help implement the second
euro-area recommendation on resilience, and the recommendation (1) helps implement
the third euro-area recommendation on macro-economic and financial stability set out
in the 2025 Recommendation.
HEREBY RECOMMENDS that Cyprus take action in 2025 and 2026 to:
1. Reinforce overall defence spending and readiness in line with the European Council
conclusions of 6 March 2025. Ensure that net expenditure respects the path
recommended by the Council on 21 January 2025.
2. In view of the applicable deadlines for the timely completion of reforms and
investments under Regulation (EU) 2021/241, accelerate the implementation of the
recovery and resilience plan, including the REPowerEU chapter. Accelerate the
implementation of the cohesion policy programme (ERDF, JTF, ESF+, CF),
building, where appropriate, on the opportunities offered by the mid-term review.
Make optimal use of EU instruments, including the opportunities provided by the
InvestEU and the Strategic Technologies for Europe Platform, to improve
competitiveness.
3. Strengthen research and innovation and the commercialisation of research results by
fostering public and private R&D investment, enhancing research-business
synergies, and adopting a continuous long-term research and innovation strategy with
input-output indicators and multiannual funding. Facilitate the diversification of the
economy and further productive investment by enabling alternative saving and
investment instruments, increasing financial literacy, facilitating the participation in
capital markets and improving access to non-bank financing opportunities for
businesses. Simplify regulation, improve regulatory tools and reduce administrative
burden, especially focusing on improving licensing and permitting procedures for
investment and setting up new businesses. Improve the governance of state-owned
enterprises by aligning it with international best practices, including merit-based
nomination of boards, ownership policy and performance-based management.
4. Reduce overall reliance on fossil fuels and further diversify energy supply, notably
by developing energy interconnections with neighbouring countries, scaling-up
funding for energy efficiency, promoting sustainable transport and upgrading the
electricity grid and energy storage facilities, to accommodate an increasing share of
renewables. Address energy poverty. Step up investments in water, waste water, and
waste management infrastructure, promote sustainable water use practices, and
strengthen efforts to prevent waste and improve the separate collection of municipal
and packaging waste. Improve the implementation of climate adaptation measures,
by focusing on improving the institutional framework governing climate adaptation.
5. Address labour shortages and skills mismatches by strengthening labour market
participation of young people, further increasing the capacity and attractiveness of
vocational education and training as well as promoting adult learning. Step up policy
efforts to strengthen green and digital skills. Further increase participation in early
childhood education and care, improve basic skills, and increase students’
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participation in science, technology, engineering and mathematics (STEM) fields.
Improve the availability of and access to long-term care services by introducing a
modern, adequately funded, integrated long-term care model.
Done at Brussels,
For the Council
The President