Adoption of Euro Heralds New Era

Cyprus’ imminent adoption of the euro currency on 1 January was hailed as a new era by President Tassos Papadopoulos at a special ceremony in Nicosia just before midnight on 31 December. Cypriots prepared for the changeover by exchanging Cyprus pounds for euro notes and coins and familiarizing themselves with the official conversion rate of C£1=€1.71 (or €1=C£0.585274). Cyprus’ adoption of the euro, together with Malta, would expand the euro-zone to 15 of the 27 EU member states.

President Papadopoulos said that “the introduction of the euro is not simply a change of our national currency, it is in essence a change in our way of life, the crown of our European identity, the culmination of a correct fiscal policy, which we have followed with consistency and responsibility over the past few years”. He added: “As of tomorrow our lives will change gradually for the better. The euro will secure currency stability, open new horizons for the local economy and bring European citizens closer.”

Finance Minister Michalis Sarris also took pride in the achievement of the Government’s most important goal since Cyprus joined the EU in May 2004. Speaking on 21 December, he said that euro-zone membership “will bring important benefits to households, consumers and enterprises, since the zone is an area of low inflation, low interest rates and a vast market of 320 million people where transparency prevails over prices of goods”.

As regards fears that the switch to the euro would result in price rises for consumers, Mr Sarris had on 5 December secured the agreement of his fellow EU Finance Ministers to an extension of Cyprus’ exemption from VAT on food, medicines and restaurant services. The exemption had been due to expire on Cyprus’ euro-zone entry on 1 January, but was now extended until the end of 2009.

The Monetary Policy Committee of the Central Bank of Cyprus (CBC) on 21 December reduced its key refinancing interest rate by half a point to 4 per cent to bring it into line with the benchmark rate of the European Central Bank (ECB) 10 days in advance of Cyprus’ entry into the euro-zone. The CBC’s Lombard and overnight deposit rates were left at 5 per cent and 3 per cent respectively.


Offshore Gas Terminal Voted Down

Government plans for an interim offshore natural gas terminal (see CN 11/2007) were effectively derailed by the House of Representatives on 18 December when it voted overwhelmingly for amendments to draft legislation on the importation of gas. Spokesman Vasilis Palmas said that President Tassos Papadopoulos reserved the right to resubmit the legislation but accepted that an offshore terminal was now unlikely.

Tabled by Commerce, Industry and Tourism Minister Antonis Michaelides, the legislation sought to provide a framework for the importation of liquefied natural gas (LNG), which would be achieved via an offshore terminal for an interim five-year period until the construction of a land terminal at the Vassiliko energy complex. The Government had wanted the Energy Regulatory Authority (RAEK) to have the power to issue licences for gas supply and distribution pending the declaration of Cyprus as an “emerging market” so that a new Public Natural Gas Company (DEFA) could control LNG importation.

However, the amendments adopted by the House stripped the RAEK of the right to issue LNG supply licences to private companies, thus making the proposed floating terminal unfeasible. Eight MPs of the Democratic Party (DIKO) abstained on the amendments, but they joined the other parties in voting for the amended bill as a whole, on which only one MP of the EDEK Social Democrats abstained.

The House decisions were welcomed by the Cyprus Electricity Authority (EAC), which had argued that an offshore terminal would be a diversion from the urgent need to build a land terminal and that the issuing of private licences by the RAEK would undermine the role of DEFA. The EAC had been allocated a 39 per cent stake in DEFA, with the Government holding 61 per cent.

Commenting on the outcome, Mr Palmas denied that it was a defeat for the Government and warned that as adopted the legislation might not be compatible with EU competition law and might therefore be challenged by affected companies in the European Court of Justice. The President had 15 days to decide whether to resubmit the original bill to the House and then had the right, if the same amendments were readopted, to refer it to the Cyprus Supreme Court for a ruling on whether it breached the Constitution and/or EU law.

The 5th Euro-Mediterranean Ministerial Conference on Energy held in Limassol on 16-17 December was the most important EU event hosted by Cyprus since it became a member in May 2004. The delegates adopted a comprehensive Priority Action Plan for energy co-operation in 2008-13, which was expected to attract European Investment Bank funding of 212.4 billion. Speaking after the gathering, Mr Michaelides expressed regret at the non-attendance of Turkey, saying that its absence "contradicts the spirit of fraternization between the peoples" of Europe and the Mediterranean region.


Loukoumi Protected

The inclusion of the dessert loukoumi from the coastal town of Geroskipou on the EU’s official list of products of protected designation of origin (PDO) was confirmed by the Agriculture, Natural Resources and Environment Ministry on 19 December. The application for protection of what is often known as Greek or Turkish delight had met no objections in the EU.

In another success for Cyprus, EU Agriculture Ministers on 19 December gave final approval to PDO status for zivania, the national alcoholic drink dating from Venetian rule (1489- 1571). They also confirmed PDO status for the spirit ouzo for both Cyprus and Greece.


House Adopts Last Budget in Pounds

The Government’s budget for 2008 was adopted by the House of Representatives on 20 December by 37 votes to 17 after a contentious three-day debate. It was the last budget to be designated in pounds pending Cyprus’ accession to the euro-zone on 1 January 2008 (see page 1), following which it will be converted into euros at the EU-mandated
rate of C£1=€1.71.

The budget provides for total expenditure of C£3.9 billion and revenue of C£3.3 billion, giving a fiscal deficit equivalent to 0.5 per cent of projected GDP, which is expected to maintain a 4 per cent growth rate. However, the achievement of a 1.5 per cent budget surplus in 2007 (see CN 11/2007) indicates that Cyprus will continue to be in fiscal surplus in its first year of euro-zone membership. The inflation rate is expected to hover around 3 per cent in 2008 and unemployment to average about 4 per cent.

The budget was approved by MPs of the AKEL party (although with some reservations), the Democratic Party (DIKO), the EDEK Social Democrats, the European Party (EVROKO) and the Ecologist Party. The opposition Democratic Rally (DISY) voted against what its leader, Nicos Anastasiades, described as a budget lacking in vision for the future.


C£75m Package of New Welfare Measures

A C£75 million package of new welfare measures was unveiled on 5 December by President Tassos Papadopoulos, who said that the Government’s successful management of the economy allowed it to provide additional assistance to those who need it most in society. The measures were in addition to the C£121 million package of increased benefits and tax cuts introduced in October (see CN 10/2007).

President Papadopoulos recalled that he had “repeatedly pledged that the Government, recognizing that our entry into the euro-zone has been achieved with the joint efforts and sacrifices of society, will demonstrate its appreciation with targeted measures of social support for the more vulnerable economic groups”. Because the economy in 2007 “has exceeded every expectation”, producing an unexpected budget surplus (see CN 11/2007), “we are again sharing the benefits with citizens”.

The package included an immediate reduction in the consumer tax on heating fuel from 7.3 cents to 1.2 cents a litre and pre-Christmas payments of C£300 to some 100,000 pensioners with monthly incomes of less than C£500, with those on C£500-700 getting C£100. Other measures included higher child benefit for larger families, to take effect from 1 January, and a C£30 million start-up grant for a new Consultative Body on Social Policy charged with making proposals on welfare measures.