Benefits of the euro for Cyprus

The euro will strengthen macroeconomic stability in Cyprus, ensuring low inflation and low interest rates that are a pre-condition for long-term economic prosperity. The single currency brings stable prices for citizens and more opportunities for businesses. Moreover, being part of the single currency and the euro area also engenders further trade opportunities in the global economy and attracts foreign investment.

 

Low interest rates

By adopting the single currency, Cyprus will benefit from the historically low interest rates currently enjoyed by euro area members. Cyprus’ interest rates have already fallen considerably. The long-term interest rates, declined  by some 330 basis points  from  about 7½% in December 2001 to just 4¼% in December 2006. Furthermore, over the same period mortgage interest rates fell 160 basis points from around 8% down to 6½%. This brings very practical benefits, allowing Cypriot citizens and businesses to borrow money cheaply and with enhanced security. For example, a Cypriot who took out today a mortgage of CY£100,000 with 15 years maturity, will pay around CY£855 each month compared to CY£940 back in 2001. Over these 15 years she would have saved around CY£15,000. Membership of the euro area will safeguard these gains and will help shield Cyprus against economic turbulence and significant interest increases.

 

Price stability

By adopting the single currency, Cyprus will join an economic and monetary union with a proven track record of low inflation and price stability. Although Cyprus has traditionally had a good inflation track record -with HICP inflation below 3% for most of the last decade- in recent years inflation declined close to or even below euro area levels. Cyprus’s adoption of the euro would ensure that low inflation is preserved and anchored in a sustainable manner.

 

Job creation

Being part of the economic and monetary union means a stable economy that fosters certainty for business activities, boosts trade and strengthens investors’ confidence. This should translate in higher economic growth and further job creation. In the euro area, unemployment is currently at its lowest since 1993 and job creation has been significantly higher since the introduction of the euro. In Cyprus, employment increased on average by 2.8% over the last 10 years, as the Cypriot economy has become increasingly integrated with that of the EU. Employment is projected to keep growing solidly over the period 2007-2008.

 

 

Reduced costs for travellers

With the disappearance of exchange rate costs, Cyprus‘s attractiveness as a tourist destination will be enhanced. Also Cyprus citizens travelling abroad will have beneftis. They will not only be relieved from the annoyance of exchanging money at borders but can expect to make considerable savings. The famous example of the tourist travelling in the EU in the 1990s best illustrates the savings brought about by the single currency. With DM 1,000 in his pocket and changing money in each country, the traveller would be left with DM 500 on returning home – without having made a single purchase!

 

Lower costs for businesses

The euro saves money for Cypriot enterprises and supports a dynamic business environment. In the European Union, businesses have been relieved of an estimated EUR20-25 billion in costs following the introduction of the euro and disappearance of exchange rate charges. With the introduction of the euro, Cypriot businesses will face lower costs related to invoicing, such as the updating of price lists. In addition, businesses operating in Cyprus will have access to a large and liquid market in a currency which would then be used domestically. This should also lead to a reduction in borrowing and hence operating costs, allowing Cypriot companies to become more competitive. Furthermore, considering the large number of international business units and companies operating from Cyprus, the gains will be significant.

 

Increased trade

The euro facilitates trade by eliminating transaction costs and exchange rate risks, making Cyprus a more attractive trading partner. It is estimated that the euro has already increased trade within the euro zone by 4-10% since its launch. For Cyprus, this represents a significant advantage as the Cyprus economy relies heavily on imports and exports. External merchandise trade represents around 45% of GDP and more than half of Cypriot trade is with euro area members. Trade in services with the euro area accounts for around 30% of the total.  

 

A strong and attractive international currency

As a euro area member, Cyprus will have a currency with a global position comparable to the US dollar. The role of the euro in international trade, the global bond market and as an official reserve currency has increased substantially and continues to grow in importance. On some measures, the euro has even overtaken the dollar in the international bond market to represent 46% of outstanding bonds as opposed to 37% for the dollar in early 2005. Moreover, the value of euro coins and bills in circulation recently overtook that of US dollars, with 782.1 billion US dollar worth of euro coins and bills in circulation versus 754.8 US dollar coins and bills in December 2006. Euro cash is also increasingly used outside the euro area, with 10-20% of the total value of euro banknotes in circulation currently held outside the euro area. The attractiveness of the euro as a world currency means that tourists can increasingly travel all over the world with euros in their pockets while businesses are increasingly able to trade in euros beyond the borders of the euro area.

 

How can Cyprus maximise the benefits of the euro?

Although euro adoption isconducive to faster economic growth, an appropriate policy framework is neededto ensure that the benefits accruing from participating in the single currencyarea are fully realised. In particular, pursuing responsible public financepolicies and implementing the necessary structural reforms that ensure flexibleproduct and labour markets will help the Cypriot economy respond to externalshocks, while maintaining price stability and bolster internationalcompetitiveness and growth.