Questions about Cyprus
Lithuania will be told today that it cannot join the euro, because its inflation rate is around 0.03% above the target, according to reports in FT.com, thus sparking concerns that the EU authorities will be much tougher with all countries hoping to adopt the euro, including Cyprus.
Lithuania beat Cyprus to the Exchange Rate Mechanism (ERM2) by joining in 2004, immediately after EU membership. This should have allowed it to adopt the euro in 2007.
Cyprus, which was running a big budget deficit at the time, had to join a year later in May 2005, so it is aiming to adopt the euro in January 2008.
However, Lithuania’s hopes of being among the first new members to adopt the euro have now been dashed, because ofwhat seems to be a tiny slip in inflation.
Lithuania’s inflation in March was about 2.63%, compared with a target of 2.6%.
The authorities’ toughness with Lithuania is somewhat surprising, given that the Lithuania has a rock-stready exchange rate with the euro thanks to its currency board–a much stronger from of exchange rate peg than that used by Cyprus–and that it meets the difficult fiscal criteria which the bit eurozone members such as Germany and France have struggled with.
The economy is also growing fast, which is partly why inflation is also higher than in more mature rising.
But it seems that the EU authorities have decided to use Lithuania as an example to others, to show that eurozone aspirants should not take adoption of the euro for granted.
What about Cyprus?
This raises questions for the other member states wanting to adopt the euro.
Cyprus’ 12-month harmonised inflation rate reached 2.0% in April. Although this was lower than in Lithuania (2.63%), inflation has been on the rise in Cyprus in recent months, reaching 2.5% in April alone.
In any case, being a bit lower now does not guarantee that the inflation goal will be met in the future, especially as the inflation-rate criterion is a moving target.
The EU authorities (Commission European Central Bank, eurozone members etc) take the lowest 12-month inflation rates (eg August to July) of the three member states which have the lowest inflation rates.
This month, that rate happened to be 2.6%, only 0.03% lower than Lithuania’s 12-month inflation rate.
But for the authorities, that was no good enough.
For Cyprus there is also the nagging question about how much money the goverment may have to pay out for Turkish Cypriot property claims from a fund that, as far as anyone can tell, is dry.
Estonia, which joined ERM2 at the same time, has already given up the race to adopt the euro in 2007, owing to high inflation.
That leaves only Slovenia, the richest of the east European new members, likely to adopt the euro in 2007.
Fiona Mullen
