The Cyprus government finally ditched its illogical target of adopting the euro in 2007 and yesterday set January 1, 2008 as the official target date.
This unofficial date had been known for some months. Statements made during a visit to Cyprus in May by the European Commissioner for Economic and Monetary Affairs, Joaquin Almunia, followed by recent press releases by the European Commission, made it clear that January 2008 was Cyprus’ official target, but the government and Central Bank refused to confirm this until a cabinet decision had been made.
The official decision should pave the way for an information campaign which has been lacklustre so far.
The campaign will include dual pricing–showing prices in euros and in Cyprus pounds–for a period after the “irrevocable exchange rate” between the Cyprus pound and the euro is fixed. The Central Bank is expected to allow dual circulation of the currencies for one month so that people can familiarise themselves.
Around three-quarters of Cypriots hve already used euro notes and coins, according to the Eurobarometer survey.
2007 was unlikely anyway
The earliest possible date on which Cyprus could have joined the euro would have been May 2, 2007, in the middle of a tax year. This is because a currency must spend at least two years in the Exchange Rate Mechanism (ERM2) without devaluation before being allowed to adopt the euro.
The Cyprus pound entered the Exchange Rate Mechanism (ERM2) on May 2, 2005 at a central rate of 0.585274 per euro. It has since appreciated in value as borrowers rush to take out loans in euro.
As well as successful participation in ERM2, the government must also
meet three other criteria on inflation, interest rates and public finances. The toughest criterion to meet is the budget.
The Maastricht criteria
1. Participation of the currency in Exchange Rate Mechanism (ERM2) for at least two years without major difficulties and without a devaluation of the central parity. In practice currencies will be expected to fluctuate much less than the permitted 15%. Assessment will be made based on latest daily average rates for the previous two years.
2. A general government deficit not exceeding 3% of GDP and a general government debt level not exceeding 60% of GDP or “sufficiently diminishing” to that ratio. Assessment will be based on latest annual budget and public debt data (ie probably the 2006 performance in the case of Cyprus). The government says it will meet this target if a number of measures are passed by parliament.
3. A harmonised rate of inflation not more than 1.5% above the average of the three EU member states (not just euro area) with the lowest inflation rates. The calculation excludes countries with deflation. Assessment based on the latest 12-month inflation rates in the previous 12 months. So far, Cyprus is on course to meet this target
4. Ten-year government bond yields, not exceeding the average rates of the three countries with the lowest inflation rates by more than 2 percentage points. Assessment based on the latest 12-month interest rates in the previous 12 months. Cyprus looks on course to meet this target.
Fiona Mullen
