European Commission Removes Cyprus from Macroeconomic Imbalance List, Urges Action on Key Challenges

Cyprus is no longer regarded as a country experiencing macroeconomic imbalances, according to the European Commission’s 2025 Spring Package issued under the European Semester framework. The decision reflects a consistent reduction in vulnerabilities tied to both external and private debt, underpinned by robust economic growth over recent years.

While welcoming the country's progress, the Commission has issued a set of targeted policy recommendations to ensure ongoing reforms and continued investments in critical areas. Cyprus still faces considerable structural challenges, particularly in innovation, environmental sustainability, education, and long-term care services.

A senior EU official outlined five positive trends observed in Cyprus’s economy, stating that “economic growth in Cyprus remains strong despite a fragile international environment.” Public finances have also seen significant improvement, with the country recording large surpluses and a rapidly declining public debt burden. The Commission attributed the removal of Cyprus from the macroeconomic imbalance list to these positive trends, as well as the country’s success in diversifying its economy.

Cyprus has shown improvements in most of the United Nations sustainable development indicators, further supporting the Commission’s decision. However, the report identifies ten critical challenges that need to be addressed to maintain progress and ensure long-term sustainability.

The European Commission cautioned against rising public expenditure and advised the Cypriot government to stick to the agreed annual fiscal trajectory for 2025, noting a slight deviation at this stage. A particular weakness was highlighted in the domain of research and innovation. Cyprus continues to lag behind the rest of the EU in investment in this area, spending only 0.29 percent of its GDP compared to the EU average of 0.72 percent.

According to the Commission, the national innovation system suffers from “weak links between universities, the financial sector, businesses, and the state.” It emphasized the need to reinforce the country’s research and innovation strategy with “clear goals, indicators, and monitoring mechanisms.” Legislative changes were also recommended to improve the commercial use of research outcomes.

The financial sector was another area identified for reform. The Commission encouraged Cyprus to enhance its financial ecosystem beyond traditional banking and improve financial literacy levels, which currently fall below the EU average.

Regulatory and administrative complexity continues to hinder businesses in Cyprus, with 68 percent of firms reporting that procedural burdens impede their operations. Governance in state-owned enterprises was flagged as inadequate, falling below international standards in key areas such as board oversight and operational efficiency.

The energy sector was described as facing “high hurdles,” with carbon-based fuels still dominating consumption and the pace of transition to cleaner energy sources remaining slow. Cyprus remains vulnerable due to its dependence on energy imports and a lack of interconnectivity. Household electricity prices are among the highest in the EU, driven in part by cooling costs during hot weather. The Commission pointed to weaknesses in environmental performance, noting poor water resource usage, low investment in infrastructure, and insufficient recycling practices. Cyprus also has the highest per capita food waste in the EU and recycles less waste than it generates. In terms of climate change adaptation, Cyprus spends significantly less than the EU average, and the Commission has called for improved coordination and governance to implement the national strategy effectively.

Education and labour market developments also raised concerns. Basic skills among youth in Cyprus have declined more steeply than in any other EU member state since 2018. Participation in STEM education is the lowest in the EU, and access to long-term healthcare for the elderly remains limited. Public spending in this sector is also the lowest among member states.

The Commission outlined five policy recommendations for Cyprus for the 2025–2026 period. The country is advised to increase defence spending in accordance with EU fiscal rules and remain within expenditure limits as outlined in the revised economic governance framework. The implementation of Cyprus’s Recovery and Resilience Plan, along with the absorption of cohesion funds, must be accelerated to fully utilise available EU resources and enhance competitiveness by the end of 2026.

The Commission called on Cyprus to prioritise improvements to its structural environment in order to foster productive investments and drive innovation. Public and private investment in research and development should be increased, with a focus on commercialising results and promoting partnerships between academic institutions and businesses.

To support business growth, the Commission recommended better access to alternative financing, increased financial education, and the development of non-bank funding sources. Simplifying regulation and reducing administrative burdens, especially around licensing and launching new businesses, were also highlighted as necessary steps. Governance in state-owned enterprises must be strengthened by adopting international best practices in areas such as board management, ownership, and performance monitoring.

Reducing reliance on fossil fuels remains a priority. The Commission urged Cyprus to invest in energy interconnections with neighbouring countries, boost funding for energy efficiency, and promote the use of sustainable transport. Modernising the electricity grid and energy storage infrastructure was also advised to improve the integration of renewable energy sources and alleviate energy poverty.

In water, sewage, and waste management, the Commission called for increased investment and the adoption of sustainable water usage practices. Recycling policies and waste prevention strategies must be enhanced, especially in light of the country’s current underperformance in these areas.

The Commission also recommended that Cyprus strengthen its institutional framework to ensure the effective implementation of climate adaptation policies.

Labour market challenges and skills development formed the final set of priorities. Cyprus must address labour shortages and the skills mismatch between workers and market demands. The Commission stressed the importance of increasing youth participation in the labour force and vocational training opportunities. Lifelong learning should be promoted, and efforts made to develop both green and digital skills. Expanding early childhood education and participation in STEM fields was also encouraged.

On the issue of long-term care, Cyprus is expected to develop a comprehensive and well-funded system that adequately meets the growing needs of its ageing population.

In conclusion, the Commission stated that Cyprus stands to benefit significantly from EU-funded projects under the Recovery and Resilience Facility. However, the country must ramp up efforts to fully leverage these opportunities by the end of 2026.

By fLEXI tEAM