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5398/14 COM (2014) 118 FINAL EXPLANATORY MEMORANDUM ON EUROPEAN UNION DOCUMENT PROPOSAL FOR A COUNCIL IMPLEMENTING DECISION AMENDING IMPLEMENTING DECISION 2013/463/EU ON APPROVING THE MACROECONOMIC ADJUSTMENT PROGRAMME FOR CYPRUS March 2014 Submitted by HM Treasury SUBJECT MATTER 1. This Explanatory Memorandum (EM) covers the proposal for a Council Implementing Decision to amend the macroeconomic adjustment programme for Cyprus. 2. The European Commission, in liaison with the European Central Bank (ECB) and the International Monetary Fund (IMF), has conducted the third review of the financial assistance programme to Cyprus. In light of the review, the Council Decision would amend the Memorandum of Understanding (MoU) for the programme, in order to reflect the progress to date and the remaining policy challenges for Cyprus. 3. The proposed changes apply to financial sector reform, fiscal policy, and structural reforms. They are explained below. 4. On fiscal policy: the general government primary deficit target in 2014 is to be revised to 1.8% of GDP, from 4.25% of GDP. This reflects a smaller-than-expected output contraction in 2013 and the 2014 Budget. The targets for subsequent years remain unchanged. The revised MoU states that, for fiscal policy in 2015-2016, the Cypriot authorities shall pursue a general government balance in line with the adjustment path respecting the Excessive Deficit Procedure (EDP) recommendation. This requires a headline deficit of no more than 6.3% of GDP in 2015 and 2.9% of GDP in 2016. 5. On the financial sector: A communication strategy on the roadmap for relaxation of capital controls, and on implementation of the banking sector strategy, is to be designed by a joint Central Bank of Cyprus and Ministry of Finance task force. Banks are to report on the potential impact on capital, profitability and coverage ratio of the newly introduced, and upcoming, European Union rules on capital requirements and non-performing loans. Plans on reform of the legal framework for private debt restructuring are to be reviewed. A task force is to be established to assess the magnitude of registered, but untitled, land sales contracts, and to provide recommendations on this issue. 1 A comprehensive reform framework for appropriate corporate and personal insolvency procedures is to be established. The Civil Procedure Code and Court Rules are to be reviewed to ensure a smooth and effective functioning of the revised foreclosure and insolvency frameworks. 6. On structural reform: The first stage of a National Health System (NHS) is to be implemented, following a roadmap. The revised MoU extends the deadline for this from end2015 to mid 2016. Policies on pricing and reimbursement of medical goods and services are to be revised. A Privatisation Unit is to be established. An action plan is to be set out for addressing the shortcoming identified in Phase 2 of the peer review by the Organisation for Economic Co-operation and Development Global Forum on Transparency and Exchange of Information for Tax Purposes. A growth strategy based on Cyprus' competitive advantages is to be developed. 7. The proposed Decision will ensure full consistency between the Union multilateral surveillance framework established by the Treaty of the Functioning of the European Union (TFEU) and the policy conditionality underpinning the financial assistance. 8. Article 10 of Regulation (EU) No 472/2013 provides for consistency in reporting and monitoring obligations. SCRUTINY HISTORY 9. EM 13151/13 on the proposal for a Council Implementing Decision on approving the macroeconomic adjustment programme for Cyprus and repealing Council Decision 2013/236/EU was submitted for Parliamentary scrutiny by HM Treasury on 9 September 2013. 10. EM 8648/13 on the Council Decision addressed to the Republic of Cyprus on specific measures to restore financial stability and sustainable growth was submitted for Parliamentary scrutiny by HM Treasury on 6 May 2013. MINISTERIAL RESPONSIBILITY 11. The Chancellor of the Exchequer has responsibility for United Kingdom policy on European Union monetary and economic issues. The Foreign and Commonwealth Secretary is responsible for overall United Kingdom policy towards the European Union. INTEREST OF DEVOLVED ADMINISTRATIONS 12. Policy concerning the EU Budget is a reserved matter under the UK’s devolution settlements and no devolved administration interests arise. The devolved administrations have therefore not been consulted in the preparation of this EM. 2 LEGAL AND PROCEDURAL ISSUES i. Legal basis 13. Article 7(2) of Regulation (EU) No 472/2013 of the European Parliament and Articles 121(6) and 136 TFEU. ii. Legislative procedure 14. Qualified Majority Voting (for the Council Decision). iii. Voting procedure 15. Per Article 15 of Regulation (EU) No 472/2013, only members of the Council representing euro area Member States may take part in the vote, which is by Qualified Majority Voting. The vote of the member of the Council representing the Member State concerned will not be taken into account in such a vote. iv. Impact on United Kingdom Law 16. None – this Decision is addressed to Cyprus only. v. Application to Gibraltar 17. Not applicable. vi. Analysis of Fundamental Rights Compliance 18. This proposal does not appear to engage any of the rights laid down in the European Convention on Human Rights or in the First or the Thirteenth Protocol. APPLICATION TO THE EUROPEAN ECONOMIC AREA 19. Not applicable. SUBSIDIARITY 20. The EU has competence under the Treaty for multilateral surveillance of economic policies. Member States remain responsible for their national budgetary policies subject to the provisions of the Treaty. POLICY IMPLICATIONS 21. The Implementing Decision does not have any direct policy implications for the UK, and the UK does not have a vote. Cyprus is a Commonwealth member and the UK supports its efforts to address its financial difficulties. REGULATORY IMPACT ASSESSMENT 22. Not applicable. 3 FINANCIAL IMPLICATIONS 23. There are no direct financial implications to the UK arising from this document. Financial assistance to Cyprus is provided by the European Stability Mechanism (ESM), in which the UK does not participate. CONSULTATION 24. Not applicable. TIMETABLE 25. The revised version of the Proposal for a Council Implementing Decision was endorsed by the Economic and Financial Committee on 28 February 2014. It will be voted on by euro area Member States at AGRIFISH Council on 24 March 2014. NICKY MORGAN ECONOMIC SECRETARY TO THE TREASURY 4