CYPRUS and the European Union should reach agreement on the country’s admission into the European exchange rate mechanism (ERM2) by the end of next March, Central Bank of Cyprus Governor Christodoulos Christodoulou said yesterday.
“I agree with the government’s aim of joining as soon as possible,” he told Reuters after a meeting in parliament.
“The government should make its position clear by the end of the year and (by) the end of March there should be a conclusion with the relevant institutions in the EU.”
Like other EU newcomers, Cyprus will need to have its currency inside the ERM2 for at least two years before it can adopt the euro. It is seen making its bid for ERM2 entry later this year or early 2005.
Christodoulou said the Cabinet had reaffirmed on October 19 that Cyprus should press ahead with its bid.
ERM2 membership would require anchoring the Cyprus pound to the euro at a central parity rate with a 15 per cent fluctuation band.
It had been widely expected to pitch its bid for ERM2 admission immediately after Cyprus joined the European Union last May, but fiscal slippage and the debate on the Annan plan put it on the backburner.
In a presentation to the House Finance Committee earlier, Christodoulou said that the prevailing wisdom in Europe was to group together Cyprus and Latvia for their ERM2 ambitions.
Of the 10 mainly eastern European countries which joined the European Union in May, three – Slovenia, Lithuania and Estonia – are already in ERM2.
Cyprus has set 2007 or very early 2008 as its target for adoption of the euro, and Latvia 2008.
“It is very important not to miss our targets,” Christodoulou told deputies.
A convergence plan envisages trimming the island’s budget deficit to 2.9 per cent of gross domestic product by the end of 2005, putting it just about within the margins of EU euro thresholds. The deficit is expected to peak at 5.2 per cent for 2004.
“We have to show consistency and that we mean what we say,” said Christodoulou, who recalled that the convergence plan was the latest addition after a series of economic pledges Cyprus made but did not keep.
But he said the economy had deep-rooted structural problems.
“I would want to focus on spending, on the repeated overheads. In 2000 we had a state payroll of 668 million pounds, in 2004 it grew to £1.06 billion. The question is, how do you tame it?”
The Cyprus pound has been pegged to the euro, and its predecessor, the ECU, since 1992. The present reference rate is one Cyprus pound equalling 1.7086 euros, and the currency now fluctuates in an unofficial band of 15 per cent.
In the first 10 months of the year the pound had appreciated against the euro by 1.52 per cent, with the fluctuation staying in the narrow confines of 2.25 per cent, Christodoulou told parliament.
“This is proof of a strong pound which by and large underpins the public’s confidence in the currency,” he said. (R)
