Euro introduction to help solve Cyprus problem?

The introduction of the euro in Cyprus, planned to become legal tender from January 2008 provided Cyprus meets the economic criteria by June/July 2007 should not be seen as an important economic and financial event, but also as a possible solution that may help in efforts to solve the Cyprus problem.

Antigoni Papadopoulou (DIKO MP) and Chairwoman of the House Finance Committee made the remarks in response to a plea by fellow coalition partners AKEL, insisting that the recent improvement in key economic criteria allows the government enough room to increase the subsidy on petrol tax used for household heating.

AKEL MP Stavros Evagorou said with the deficit as a percentage of GDP set to decline below 2% in 2006, “the government can afford to subsidise and reduce the tax on petrol used for heating.”

The comments were challenged by Papadopoulou who said that while its true that the economic ratios are improving, but she called on everybody to realize that the government still needs to find solutions for the long term viability of the Social Insurance Fund as well as keep the ratios in good condition ahead of the adoption of the euro.

“The euro adoption is not a pure financial event, but it may also help efforts to solve the national problem, as both sides will have one common currency, the euro, which by itself will solve so many other problems,” said Papadopoulou.

Experts generally agree with this assessment.

Finance Minister Michalis Sarris told a conference on reunification efforts that the euro could be a unifying factor. “If we see what we are able to do right now, imagine what we could do under reunification if we are sensible,” he said.

Dr George Kyriacou, Assistant Manager of the Department of Economic Research at the Central Bank, said joining the eurozone was expected to have an overall positive impact on the economy of Cyprus, but would also contribute to the improvement of the general climate.
“In general, the existence of the euro contributes to the building and fostering of a European identity. By adopting the euro, Cyprus becomes an integral and dynamic part of Europe and participates more actively in the process of European integration. This is for the benefit of not only Greek Cypriots, but also Turkish Cypriots, who also have European-oriented aspirations,” he said.
“In this context, the process of European integration can also facilitate or improve the climate for steps leading to further efforts for the reunification of the island, which can be promising.”
Kyriacou added that beyond the general boost, there was also a direct way in which eurozone entry could contribute to reunification.
“It is well known that the discussions on the issue of the common currency in the envisaged ‘United Cyprus Republic’ proved to be very difficult and practically remained unresolved in the 2004 negotiations sponsored by the UN. Therefore, and given a working assumption that reunification is a common goal for both sides, the adoption of the euro in Cyprus automatically removes one important obstacle encountered before in efforts to find a solution in Cyprus,” he said.
“Indeed, this is one very concrete example that demonstrates how the European framework and institutions can be catalytical in the efforts to find a solution and to reunify the island in ways that can be agreeable and beneficial to all parties involved.”
OEV Director General Michael Pilikos said the extensive use of the Turkish lira by Turkish Cypriots had caused many problems to the Turkish Cypriot economy, such as very high inflation and interest rates. He said the Turkish lira had recently gained relative stability compared to the past.
“For many years now, the Turkish Cypriots, parallel to the Turkish Lira, are widely using the Cyprus pound, counting on its strong performance in order to ensure economic stability,” he said. “We believe that now they will gradually adopt the euro as their own currency as well. By doing so they will be able to keep up with the growth in the Republic of Cyprus and sustain macro-economic stability.”

Experts add that one of the main stumbling blocks when discussions were held during the Annan Plan was regarding the currency board, the central banks and who would determine economic and monetary policy.

Greek Cypriots were loathe to give up their strong Cyprus pound and were afraid the national reconciliation budget would lead to hyper-inflation and a drop in living standards. With the introduction of the euro as legal tender from 2008, most of such issues will be addressed.