Commissioner for Economic and Monetary Affairs Joaquin Almunia gave a largely positive assessment of the Cyprus economy and public finances during an official visit to Cyprus last Thursday, but raised concerns about both inflation and wages. He also urged the government to start an information campaign about adopting the euro.
Having outlined the four Maastricht criteria that must be fulfilled for Cyprus to adopt the euro, Almunia repeatedly raised concerns about inflation.
“And in this last criterion [inflation] is where I am trying to explain to the Cyprus authorities some concerns … When I listen to the authorities here in Cyprus they talk about an inflation rate at the end of 2005 around 2.5%, 2.6%, 2.4%, so they are estimating an inflation rate which is now just in the limit or even above the maximum level required,” he said.
“I have required the Cyprus authorities, for the minister some more careful attention to the inflation rate evolution.”
His comments, backed by Central Bank Governor Christodoulos Christodoulou speaking at the same conference, were initially seen as an indication that interest rates would not fall on Friday, although in the end, they were cut by 50 basis points.
Concern about wages and competitiveness
Almunia also stressed more than once his concern about the wage-indexation system known as COLA.
“The mechanism for the determination of the establishment of the wages level here can have inflationary effects,” he said.
“We have some concerns of the impact on inflation, impact on labour costs and competitiveness of this kind of indexation mechanism.”
Almunia said that once inflation has reached around 2%, the Commission believes that “wage negotiations should be linked with the productivity evolution and not with other elements.” However, he also corrected perceptions that the European Commission will force a change to COLA on Cyprus.
“We are not responsible for these decisions. The responsibles are the members of the government, the parliament or the social partners when they are negotiating. We are only calling the attention and the social and economic leaders of the consequences of this kind of mechanism and paying attention to the possible negative consequences.”
“Citizens have a right to be informed”
Almunia also said that he has insisted on a public information campaign. “Citizens have a right to be informed and they need to be informed for a smooth transition from the old currency to the new currency,” he said.
At a speech later on Thursday, Almunia outlined the three main lessons learned from other countries: the need for “careful and pro-active preparations”, for “a short and swift changeover” after the exchange rate is locked and that “the mental and psychological changeover by citizens is the most difficult part”.
