Good political reasons for doing it now
The Cyprus pound could quietly slip into the Exchange Rate Mechanism (ERM) over the holiday weekend, one year after it entered the EU, and officially start trading under the official CYP/EUR parity on May 2, according to information obtained by the Financial Mirror.
Senior Central Bank sources told us that all three member states being considered for the next round “are ready” for ERM membership and are merely waiting for the call from Frankfurt.
“It could be this Wednesday or next Wednesday,” said the senior official, while emphasising that they never know in advance exactly when the invitation will come.
Cyprus is being considered along with Latvia and Malta for the second ERM wave. Cyprus failed last June to join the ERM in the first round that comprised Slovenia, Estonia and Lithuania, primarily because of its high fiscal deficit.
However, since then, the government has cut its budget deficit from 6.3% of GDP in 2003 to 4.2% of GDP in 2004, thanks in large part to the tax amnesty, which is also expected to bring the budget deficit down even further this year, to 2.9% of GDP, according to government forecasts.
Parity fixed at the weekend
Under a system designed to minimise speculation, European Central Bank and other responsible officials give a country very short notice of joining ERM.
Cyprus Central Bank and finance ministry officials would get a call from Frankfurt on a Wednesday, asking them to attend a weekend meeting, at which the decision on the currency’s parity to the euro is taken.
The decision is deliberately taken over a weekend, when financial markets are closed.
The Cyprus pound is currently pegged to the euro at a rate of EUR 1.7086 per CYP and most observers expect that rate to be maintained.
Central Bank officials, the IMF and other independent economists have repeatedly stressed that any devaluation of the currency would be of no real benefit to the Cyprus economy, given the existence of wage-indexation.
Good political reasons for doing it now
Apart from the fact that all three ERM candidates are reportedly now ready for ERM membership, there are also two political reasons for adding the three member states now.
First, if the new members join this weekend, it will be exactly one year after the EU’s largest ever enlargement. Adding three new members will send out a political message that EU enlargement has been a success.
Second, and perhaps more importantly, it could also give some support to the euro in case French voters turn down the European constitution in their referendum on May 29.
Currency analysts have said the euro could come under pressure if one of the two most important EU members turns the Constitution down, since it would suggest that the European project is falling apart.
EU leaders could use ERM membership as a counter-attack, saying that now six out of the ten new member states are well on their way to adopting the euro (they should also cross their fingers that nobody notices how small these six economies are).
The fact that it is a holiday weekend for Cyprus and most of Europe also supports the view that this weekend would be the ideal one to take the plunge while Cypriot traders are busy over the souvla.
On the other hand, if Cypriot officials get the call on the following Wednesday May 4 instead, it would allow the three new members to join ERM on Monday May 9, the day when all member states officially celebrate Europe Day.
Fiona Mullen
