Pound-Euro Conversion Rate Set

The EU Council of Economic and Finance Ministers (ECOFIN) on 10 July formally approved the entry of Cyprus into the euro-zone on 1 January 2008, as endorsed by the EU summit in Brussels in June (see CN 06/2007). They also decided the parity at which the Cyprus pound will be locked into the euro, setting it at C£0.585274=EU1, so that one Cyprus pound will convert to 1.71 euros. Also approved by ECOFIN was the entry of Malta, so that the size of the euro-zone will be increased to 15 EU member states out of 27, with a combined population of some 320 million people.

Cyprus Finance Minister Michalis Sarris, who attended the ECOFIN meeting, described the forthcoming introduction of the euro as “a milestone in the short history of the Republic of Cyprus”, which would bring concrete benefits to consumers and businesses. He said that the decision was an endorsement of the Government’s fiscal consolidation policies, stressing that these would be continued with the aim of achieving a balanced budget by 2009. At the same time, the Government would remain committed to the EU’s “Lisbon agenda” for jobs and growth and “our vision of a socially cohesive society”.

On concerns that the switch to the euro would result in price hikes, Mr Sarris said that fair pricing agreements and other actions by the Government provided strong safeguards against this happening. He noted that inflation in 2007, at less than 2 per cent, was below the 2006 level, so that “the omens for a smooth transition are good”.

Mr Sarris expressed regret that because of the absence of a Cyprus settlement the euro would only be introduced in the Government-controlled area. He expected that the euro would be used unofficially in the Turkish-occupied area, but he stressed that “there is no question of an official adoption of the euro until the economy, the people and the territory of Cyprus are reunited”. He added, however, that the entry of the Republic of Cyprus into the euro-zone “can only have a positive impact on efforts to reunite the island”.

A European Commission (EC) report on 17 July praised Cyprus’ preparations for adopting the euro but also called for the speeding up of the countrywide information campaign and effective implementation of the fair pricing code. The Finance Ministry noted that the EC had identified areas where acceleration was
needed but expressed confidence that the changeover arrangements were on track.


Measures to Safeguard Welfare State

A C£111.4 million package of tax cuts and welfare measures for the benefit of the vulnerable was announced by President Tassos Papadopoulos on 4 July. The measures were intended, he said, to honour his pledge to take Cyprus into the euro-zone on 1 January 2008 without sacrificing the welfare state.

Over 112,000 Cypriots will benefit directly from the measures, half of them elderly pensioners and various disadvantaged groups such as single-parent families. Middle income earners will get a higher tax-free threshold, while value added tax (VAT) would be cut on certain items. The main measures are as follows:

• Increases in lower pensions - those between C£200 and C£310 a month – of between 5.1 and 13.4 per cent.
• Increased benefits for old people living alone and mothers of large families.
• Additional financial assistance for vulnerable groups, including those with special needs or long term chronic illness and the blind.
• An additional C£50 a month for single-parent families and C£30 a month for each dependent child in such families.
• Measures to boost the birth rate, including new allowances for families with three or more children, longer maternity leave and state payment for a second attempt at IVF.
• An increase in the income tax threshold from C£10,000 to C£10,750 in 2007 and to C£11,350 in 2008.
• A reduction in VAT from 15 to 5 per cent on various items, including theatre, cinema and sporting event tickets, vitamins, animal fodder and contraceptives.
• Abolition of the consumer tax on soft drinks.
• New incentives to protect the environment, including a consumer tax exemption for biofuels and subsidies for scrapping old vehicles. President Papadopoulos said that “with targeted interventions we are strengthening the population’s financially weakest groups, while with tax reductions we are paving the way for every family to enjoy a better quality of life”. Government officials stressed that the package would not de-rail budget deficit and public debt reduction targets.