Cyprus countdown to euro introduction begins

Cyprus to place euro notes and coins with banks in Autumn

Cypriot banks are set to have the first coins and bank notes in euro in the Autumn of this year, ahead of the milestone date of January 1 2008 when Cyprus is expected to join the eurozone, the Governor of the Central Bank Christodoulos Christodoulou said.
In an interview with CNA, the Governor said he believes that the economy meets the terms and conditions necessary to adopt the euro, as scheduled, and it also has all the prerequisites for good prospects within the eurozone.
He stresses however that there is no room for complacency but on the contrary there is a need to be on full alert with regard to the convergence criteria as well as the effort to purify public finances through the application of structural and not temporary measures.
The Governor of the Central Bank dismisses as “unjustified and unfounded” fears about a devaluation of the Cyprus pound prior to the changeover of the pound into the euro in June this year, saying the pound remains “firmly sound and strong”.
Christodoulou refers to “a minor headache” suffered by the Central Bank in relation to efforts to ensure that the pound does not exceed the strict fluctuation limits of 2.25%, used to assess the stability of the exchange rate.
He points out the importance of informing the public in all sectors, civil and private sector, in time and in practical terms about the introduction of the euro, noting that the change of currency is a complex undertaking.
In the interview, the Governor appeared concerned about fears expressed by the public on the fallout of the euro, in particular on possible price rises. He sees such approaches as “subjective, negative prejudice due to erroneous experiences, given what other countries now in the eurozone have observed.”
He also notes that, just as in the case of Ireland, the value of the pound is higher than that of the euro and this, he explained, limits significantly the risk of price rises.
Christodoulou said that bank mergers and sell outs are part of globalization which he believes will continue to grow unabated in the future.
In his interview with CNA, he said any moves in this respect must be carefully thought out, given that the banking system in Cyprus is the main money lender of medium-size enterprises and households. This approach will ensure the economic viability of any new banking institution, its satisfactory profitability, the maintenance of a sound capital base and sufficient customers service, followed by benefits for its shareholders, he added.
Membership of the eurozone will secure implementation of the unified fiscal policy of the European Central Bank, with one Central Bank in Cyprus, he said.
“To ensure further development of the local economy within the eurozone it is important to put into force the priorities of the National Reform Programme of the Lisbon strategy, which include changes in the structure of the economy towards high value activities, the promotion of search and strengthening competition.
On fears about devaluation of the Cyprus pound, he recalled that the pound was not devalued when it joined the Exchange Rate Mechanism II, in May 2005 and today the pound stands at 1,1% over the central rate.
Replying to questions about the logistics of the introduction of the euro, he said initially Cyprus will borrow bank notes in euro from the central bank of an EU member until such time when Cyprus has its own euro bank notes, when the borrowed notes will be returned to the lender.

As far as coins are concerned, these should be available at the Central Bank in the Autumn of 2007, he said, explaining that the EU does not allow the cutting of coins before the formal decision of the European Council on Cyprus’ eurozone membership is taken.
“The distribution of coins in euro will probably begin in October and bank notes will be allocated a month later. Banks will subsequently supply businesses with the euro, coins and notes,” he said.
On the economic impact of the introduction of the euro, the Governor of the Central Bank said the overall fallout from the euro in countries that have adopted the European currency is considered to be very small, ranging from 0,1-0,3%.
“Available statistics from the EU and the European Central Bank indicate that the adoption of the euro does not lead to a substantive or significant increase in prices,” he said.
Assuring the Cypriot public, he said a bill is before the House of Representatives providing for the compulsory writing of prices in pounds and in euros for four months before the euro is introduced and for six months afterwards.
The bill also provides for a “Euro-observation” bureau in each district to help oversee the change into the euro and monitor prices, where consumers can apply for information or to report any unjustified price rises.
Asked about the effect the euro could have on the political situation, in terms of efforts to reunify the country, Christodoulou said the euro will be the common currency throughout Cyprus and as such it will safeguard the independence of the Central Bank and secure the implementation of the unified fiscal policy of the European Central Bank.
“Overall the euro will serve as a strong unifying feature of the economy of a truly united Cyprus. I hope and wish that Cyprus will be reunited with the arrival of the euro,” the Governor has said.
On the economic prospects for 2007, he said the actual rate of growth of the Gross Domestic Product (GDP) is expected to range between 3,7-3,8%, inflation is set to slow down, public deficit is anticipated to be about 1,6% of the GDP, provided that the purification of public finances continues steadily and public debt is set to drop to 60,5% of the GDP in 2007.
Asked about changes that may occur within the Central Bank of Cyprus, the Governor explained that the most important one is that the CBC will no longer draft and implement an autonomous fiscal policy but it will participate in the shaping and application of the unified fiscal policy as this is defined by the European Central Bank.
“The Central Bank of Cyprus will be accountable to the rules and regulations of the European Central Bank,” he concluded.