CYPRUS will formally apply this week to join the eurozone in 2008, a goal the European Union has said the island is well on track to achieve.
Finance Minister Michael Sarris said yesterday the formal letter, signed by himself and the central bank governor, would be sent today or tomorrow at the latest.
The move will be a major milestone for Cyprus, which joined the EU in 2004 along with mostly east European countries and saw earlier ambitions of adopting the euro frustrated by high budget deficits.
“This is singularly the most important goal we have, short of resolving the Cyprus issue,” Sarris said yesterday.
Economists said the move would encourage more foreign direct investment to the island and spur closer alignment of Cypriot interest rates with those of the European Central Bank.
At 4.5 per cent, Cyprus’ main refinancing rate is now 100 basis points higher than that of the ECB. The Cypriot Central Bank’s next regular rate review session is on February 23.
Fiscal slippage from 2000 to 2003 saw Cyprus’ hopes of earlier euro zone admission dashed and the island was forced to wait in a queue until it got its public finances in order.
Nicosia has been following an austerity programme since 2004, designed to slash its budget deficit from above 6 per cent of gross domestic product to a projected 1.6 per cent in 2007.
It is also turning in lower public debt, expected to drop to 60.5 per cent of GDP this year from 64.5 in 2006. Both indicators are key factors underpinning the EU’s Stability Pact.
“[Our goal] confirms our strong hypothesis that a strong economy is important both for the welfare of the people and politically for the country,” said Sarris.
Sarris said the application for euro zone admission would be filed by tomorrow at the latest. The EU will assess Cyprus’ economy by June and the Cypriot pound will eventually lock into the euro.
In Brussels, Commission spokeswoman Amelia Torres said any requests submitted before March would probably be addressed in a Commission report by May in time for EU leaders meeting in June to give their approval.
“We will examine the request when we get it,” she said.
The Cyprus pound has been in the ERM2 mechanism, a proving ground for euro adoption, since May 2005. It now trades at a central reference rate of one euro equalling 0.585274 Cyprus pounds and in a fluctuation band of 2.25 per cent.
The Cypriot currency has never fallen below the central reference value. Cyprus was forced in the early stages of ERM2 admission to cut interest rates because of the risk of the pound busting its 2.25 per cent upper limit against the euro.
Economists said Cyprus’ admission to the eurozone would offer additional monetary stability and phase out the gap between Cypriot and ECB rates.
“This will assist FDIs to Cyprus, exchange risks which existed on imports and exports will disappear,” said economist Stelios Platis.
For economist Pambos Papageorgiou at Cyprus College, the move would be a boon for investors. “It’s a signal to investors that Cyprus is a safe economic environment.”
On the flip side, said Platis, the Cypriot economy would require more flexibility to compete against cheaper rivals, and maintain low levels of unemployment.
