Euro in 2008 “now a near certainty”—EIU

Sarris “looks beyond tomorrow”

 

The budget results for the first nine months of 2006, combined with a sharp fall

in the inflation rate means that the adoption of the euro on January 1st 2008 “is now a near certainty”, according to the Economist Intelligence Unit’s latest full length December Country Report on Cyprus.

The EIU, sister of the Economist magazine, says that Cyprus will be assessed in mid-2007 on the basis of its fiscal results for 2006, and the performance of inflation, interest rates and the exchange rate in the preceding 12 months.

“The budget deficit is expected to be well below the 3% of GDP threshold, while public debt is likely to meet the requirement that it should be falling rapidly towards the 60% threshold, even if it remains above,” says the report.

Over the past few months the relevant inflation rate in Cyprus has been 0.5% to 0.6% below the threshold, and “is likely to fall further”. Cyprus has already met the target on long-term interest rates, which “are unlikely to move up again unless there is a sharp rise in inflation”.

Noting that the exchange rate has been stable, moving by less than 1% against its central parity rate, the report says “Cyprus is therefore likely to meet all of the criteria with little difficulty.”

The report’s author, Fiona Mullen, says that the ease with which Cyprus will adopt the euro is down to solid fiscal management on the part of the finance minister, Michalis Sarris.

“In Sarris we have a minister who looks beyond tomorrow,” she told the Financial Mirror.

“He understands that budget management is not just about meeting the Maastricht and stability criteria now, but meeting them for the much longer term when the demographic time-bomb hits us.

“Ultimately this will lead to a lower tax burden for everybody, which can only be a good thing.”

 

Growth of 3.7% in 2007

 

The EIU’s December Country Report says that the external economic environment in 2007-08 “will not be ideal” for Cyprus as demand growth is expected to slow in the UK and Germany.

Real GDP growth is forecast to slow slightly from 3.8% in 2006 to 3.7% in 2007, before rising to 3.8% in 2008.

Growth will be led by domestic demand, especially in the construction and financial services sectors.

Interest rates within the euro area are expected to pause in 2007 and start rising again in 2008. The euro is also expected to weaken against the dollar and sterling in 2008.