Euro bid ‘hinges on deficit action’

CYPRUS’ bid to join the ERM-2 European Exchange Rate mechanism this year is likely to hinge on a review in September of its efforts to tidy up public finances, the central bank said yesterday.
Asked if he thought it feasible for Cyprus to apply to join the mechanism this year, Central Bank Governor Christodoulos Christodoulou said: “I think there is still time. (We need) to show by September that the measures contained in the convergence programme are being implemented.”
He was speaking after a meeting of the monetary policy committee, which decided to leave rates unchanged.

Cyprus has a forecast budget deficit of 4.2 per cent for 2004, above euro zone criteria. It has said it would want to join the eurozone by 2007, which would require reducing the deficit to under three per cent of GDP.

The rate mechanism, the ante room to adoption of the euro, would lock the Cyprus pound against the European currency and require it to hold within a range against the euro for at least two years.
Authorities have prepared a fiscal consolidation plan designed to cut the budget deficit and public debt, but there are elements to the blueprint which require parliamentary approval, adding to delays.

Though the plan itself has not been made public, it is understood to involve a clampdown on civil service payrolls and a review of fees for public services the government provides. It has no provision for additional taxes.

Christodoulou implicitly suggested he favoured Cyprus’ early entry to the mechanism because it would further discipline public finances.

“The European Union requires that some fundamental financial preconditions are met, rules for a healthy economy. The sooner we could get in would convey the message that this economy meets those conditions,” he said.