Euro campaign runs into trouble

Banks to lose CYP 30-35 mln

 

The campaign to adopt the euro on January 1, 2008 is headed for trouble following serious concerns among Cypriots that it will lead to rampant over-charging, and the fact that the national coordination committee charged with preparing a smooth transition has not yet come up with a plan on how to move against profiteers.

More opposition and resentment is set to emerge when it becomes apparent that the euro transition will hit the commercial banks with at least CYP 30-35 mln in losses, some of which may be passed on to the unsuspecting public. The price tag will significantly rise if the cost of conversion for the Cooperative Credit Societies and other commercial organisations as well as the government itself is taken into account.

With many organisations watching their costs closely and keen on maximising their profits, it is possible that many of the costs will be passed on the public several months after euro adoption.

Such organisations may adopt a delay to hike charges in order to escape the intense scrutiny to be expected in the first 2-3 months after euro adoption, lest they are labelled as “profiteers”.

 

Over-charging

 

According to a Eurobarometer opinion poll carried out in April, a majority of Cypriots say they have not been well informed about the euro (62%). The Central Bank, the government and the European institutions are highly regarded as sources of information.

The communication activities should take the fears of many Cypriots into account: many believe that the euro introduction will increase inflation (68.7%) or fear abuses and price fixing during the changeover (82.7%).

The results of the opinion poll underline the need for information and communication activities aimed at the general public, said Marco Buti, Deputy Director-General, Directorate General for Economic and Financial Affairs.

 

Name and shame!

 

Unfortunately, the national committee formed to inform the public about the transition to the euro and how the government will take adequate measures to stop over-charging and abuses has not yet come up with a coherent plan as to how it will handle this sensitive issue.

The Financial Mirror has learned that there are great disagreements among committee members on how the issue of over-charging will be tackled.

The only thing committee members agree to is that there should be a “name and shame” list of enterprises that hike prices after the changeover, but there are no guidelines on whether or not this is legal or if it will cover all institutions, irrespective of the nature of their business and status/position in the organisation.

A new Eurobarometer survey has recently been conducted and its results are expected to become public in November.

 

Costs pile up

 

Among the first groups to be negatively affected by the move are the commercial banks, since they will see at least a 30% drop in their foreign exchange earning as tourists exchange their euros into Cyprus pounds and Cypriots purchase euros when going abroad.

“A minimum of 30% of the foreign exchange income of the banks will be lost,” an informed source told the Financial Mirror.

For 2006, the four listed banks are forecast to report CYP 46.4 mln in foreign exchange income, which when combined with the income of the non-listed banks (primarily Alpha Bank), this amount is seen at around CYP 60 mln.

By 2007, foreign exchange income is seen growing to CYP 75 mln, which means that a third or CYP 25 mln may well disappear.

Banks will also see additional costs, estimated at CYP 5 mln for changing their systems to euros and more funds to train their staff.

Banks are not the only group to be hurt by the euro transition. All commercial establishments and businesses will have to incorporate additional costs to convert systems, invoices and applications to euro, with the biggest burden falling on the retail enterprises, which will need to have dual pricing in place before the transition.

“I guess nobody has yet factored in the cost on the private sector or even the government, which needs to change everything from its accounting/payment systems to the smallest label,” said an expert.

 

Name and Shame – 2

 

Government officials say that in a free market economy where prices on most goods and services are fixed without state interference, the only effective way to fight possible attempts by businesses to hike prices under the cover of the changeover is to “name and shame” these organisations.

“Its easy and there are no legal constraints, since the national committee will be able to compare the prices before the euro adoption and the prices afterwards. If there is an added increase, we can print the list and the businesses will not be able to sue us (the committee),” a member of the national committee told the Financial Mirror.

But what happens if the euro adoption is a legitimate cost increase, which the particular business decides it does not want to absorb? Or, as many will probably do, they increase the charges gradually either before December 2007 or after June 2008? How will the national committee react then?

These are valid questions and concerns that the national committee has not yet discussed, let alone come up with plans to address them.

 

Conditions for euro

 

Two conditions must be met for the euro to be successfully introduced in any given member state, Marco Buti, Deputy Director-General, Directorate General for Economic and Financial Affairs said in his speech during the opening ceremony of the “Euro coins Genesis” exhibition, hosted by the Central Bank of Cyprus.

First and foremost is the fulfilment of the Treaty conditions. The aspiring member state must fulfil the convergence criteria set out in the Treaty, in particular achieving a high degree of sustainable convergence. Moreover, member states must bring their legislation, in particular the Central Bank statutes, in line with the Treaty.

The second condition is just as important. Successful entry into the euro area also requires careful planning and extensive practical preparations, which involve both the public and private sectors, and of course, the public at large.

In May, Slovenia complied with the convergence criteria, and as a consequence, the Council decided in July that Slovenia will adopt the single currency on January 1, 2007. This will be the first enlargement of the euro area since Greece became a member in 2001.

Cyprus, having joined the ERM-II in May 2005, is targeting to join the euro area in 2008, and to this end is carefully implementing its fiscal strategy as laid down in its convergence programme.

The next regular report will be released before the end of the year.

 

Big Bang

 

Most of the countries currently preparing for euro introduction have chosen the “big bang” approach, said Marco Buti. This scenario involves euro banknotes and coins becoming legal tender immediately upon the country’s adoption of the euro, without any transitional period as was the case in the original changeover. They also favour keeping a short period of dual circulation of the old and new currencies. This is consistent with the lessons learned from the first-wave experience, although the “big bang” scenario is very demanding and requires particularly careful preparation, Buti said.

The European Commission undertakes information and communication activities in order to increase public knowledge about the euro and EMU and to contribute to a smooth changeover in those member states which adopt the euro.

The top priority for communication activities in 2006 and 2007 is to assist those new member states which intend to introduce the euro in their communication campaigns. The Commission is in favour of decentralised campaigns based on the assumption that to be credible and effective, information and communication activities must reflect citizens’ culture, language and concerns. The member states have to play a prominent role.

In order to encourage and financially support the member states, the Commission has entered into partnership agreements and set up a twinning programme between “old” and “new” member states.

Cyprus participates in two twinning programmes: the first with Malta and Ireland on the changeover communication strategy; and the second with Greece on technical preparations and the role of the central bank in the changeover, as well as the communication activities of the central bank.