Formal application to join euro

Cyprus formally applied to join the Economic and Monetary Union (EMU) of the EU on 13 February aiming to adopt the euro currency on 1 January 2008. Finance Minister Michalis Sarris hailed the application as “a cause for celebration”, expressing confidence that the application would be successful with resultant significant benefits for consumers and businesses.

The application was signed by Mr Sarris and the Central Bank of Cyprus (CBC) Governor, Christodoulos Christodoulou, and sent to EU Economic and Monetary Affairs Commissioner Joaquin Almunia and to European Central Bank (ECB) President Jean- Claude Trichet. Copies were forwarded to the German Government as the current holder of the EU Presidency and to Luxembourg Prime Minister Jean-Claude Juncker as chairman of the euro-zone Finance Ministers.

The letter set out why the Government was certain that it satisfied all the Maastricht convergence criteria for euro participation in the euro-zone. It also explained how legal convergence would be achieved with the passage of legislation in Parliament in March-April providing for the hamonization of the CBC with the European System of Central Banks and the switch to the new currency.

Mr Sarris said that he expected the European Commission (EC) and the ECB to evaluate the application in March-April, accompanied by detailed scrutiny by various EU economic and monetary committees. The EC and the ECB are expected to make their recommendation to EU Finance Ministers in June, for a decision to be endorsed by the European Council.

On fears that adoption of the euro would result in unjustified consumer price rises, Mr Sarris pointed out that specific measures had been agreed to avert this danger. A close watch would be kept on the prices of up to 40 basic household items and action taken if they rose unfairly. Mr Sarris had earlier announced that every Cypriot household would be supplied with a special calculator to enable them to convert pounds into euros.

The application was broadly welcomed by Cyprus’ political establishment and business community. The main discordant note was struck by the left-wing party AKEL, the senior ruling coalition party, which continued to argue that euro entry should be postponed for a year to allow time for social welfare provision to be strengthened.

•Official data issued on 14 February showed that in 2006 Cyprus’ budget deficit had fallen to 1.4 per cent of GDP, or C£115 million, from 2.3 per cent (C£183.6 million) in 2005. The Government therefore bettered its original budget deficit target of 1.7 per cent of GDP, bringing Cyprus well below the permitted euro-zone ceiling of 3 per cent. This achievement was acknowledged by EU Finance Ministers on 27 February when they approved Cyprus’ updated EU convergence programme covering the period 2006-10.


Cyprus pound safe from devaluation

Reassurance that the Cyprus pound is safe from devaluation was given on 13 February by the Central Bank of Cyprus (CBC) in a statement describing as misleading and unfounded a press advertisement claiming that the pound will be devalued when its parity against the euro is fixed prior to adoption of the single currency on 1 January 2008 (see adjoining report).

The CBC noted that the International Monetary Fund (IMF) and all other agencies concurred that the pound was strong against the euro and had never raised the issue of devaluation. On the contrary, said CBC Governor Christodoulos Christodoulou, Cyprus had the “pleasant headache” of how to prevent the pound appreciating above its 2.25 per cent fluctuation margin against the euro, not least because of an influx of some C£600 million in foreign capital in 2006.

•Mr Christodoulou on 12 February confirmed that, subject to Cyprus’ application being approved, the first euro notes and coins would be received by Cypriot banks in the autumn for distribution to businesses. The notes would be borrowed from another EU member (and returned when the CBC had printed its own) and the coins minted according to the Cypriot designs selected last year.


Trade deficit rises

Cyprus’ crude trade deficit rose sharply in 2006, as a growing economy sucked in more imports, whereas the value of exports declined as compared with 2005. Figures released by the Statistical Service on 9 February showed that imports totalled C£3,182.7 million in 2006 compared with C£2,966.8 million in 2005, while exports fell from C£719.2 million to C£644.0 million. The resultant crude deficit, excluding invisibles such as tourism, therefore increased from C£2,247.6 million in 2005 to C£2,538.7 million in 2006.

Trade with other EU members continued to dominate exchanges in 2006. Imports from EU countries accounted for 66.3 per cent of the total and exports to them for 65.1 per cent. The corresponding proportions in 2005 were 67.2 per cent and 69.2 per cent.