A THOUSAND blue and yellow balloons were released in Nicosia yesterday to mark the signing of the Treaty of Accession of the European Union. Each balloon had the EU flag imprinted on one side and the euro symbol on the other.
With Cyprus’ accession to the EU coming into force on May 1, 2004, the next concrete step to cement European enlargement is the adoption of the common currency, the euro.
All acceding states must spend two years as member states in the Exchange Rate Mechanism (ERM) before considering adoption of the euro, pushing the earliest possible entry date back to 2006. But how prepared is the Cyprus pound to be replaced by its larger European sister?
According to one source at the Central Bank, there is no hint of any delay in the adoption of the common currency by 2006.
Post-accession, all countries are obligated to participate in the ERM, but Cyprus has linked its currency to the ERM since 1992, allowing it a margin of 15 per cent on either side of the central parity.
The island’s small market has been gearing itself towards adoption of the euro since the notion of accession came to the foreground. Some market players would have liked to see an earlier entry but that would only have been possible if a solution to the Cyprus problem had materialised.
The country will therefore continue its drive towards fulfilment of the convergence criteria set out in the 1992 Maastricht Treaty in order to join the monetary union within two years of accession.
“We are not doing badly at the moment. Inflation is around two to two and a half per cent. It is rising slightly due to the increase in VAT, but that’s not a major concern,” said the source.
Although each new member state is obliged to adopt the euro, making the UK, Denmark and Sweden the only countries in the Union holding an opt-out clause, the EU has warned that joining the common currency should not be rushed. New member states are expected to converge nominally with the euro but also in real terms. “To join, you need real not just nominal adoption of the currency, in terms of Gross Domestic Product (GDP) and the standard of living. Cyprus is in good shape on these terms. We have already reached 80 per cent of the EU per capita income average. This goes beyond some existing member states like Portugal and Greece,” said the source, adding, “Our GDP growth rate is expanding faster than the EU average”.
However, the official warned that Cyprus had to keep the momentum going, remain vigilant and continue to maintain fiscal restraint. Regarding the country’s fiscal deficit, the initial date for its elimination had been set for 2005 but the knock-on effects of the Iraq war have made that date much less feasible.
The Maastricht convergence criteria for adoption of the euro cover stability in long-term interest rates, the inflation rate, fiscal deficit (must be below three per cent of GDP) and government debt (no greater than 60 per cent of GDP). According to the Central Bank official, the 2006 date for adoption remains feasible.
Practical preparations for adoption are currently in the pipeline. The EU has sent each new member state a check-list of things to do including setting up a National Central Office for protection of the euro and criminalising the making or handling of counterfeit euros.
Another source told the Cyprus Mail that planning implementation of the currency change would be premature at this stage, and the efforts would be lost.
However, Cyprus has the experience of existing member states to draw upon when planning how to raise public awareness, and avoid technical problems and market discrepancies like rounding up of prices, leading to profiteering.
