THE ACCESSION OF CYPRUS TO THE
EURO-ZONE – CHALLENGES AND CONCERNS
By: Andreas Pavlikkas
As it is known, as from 1.1.2002, twelve countries of the European Union adopted the Euro as their common currency and created a Euro-zone with almost 300 m. people, and representing 19,4% of the World Gross Domestic Product and 18,6% of the World Trade. Among the old members of the European Union only Great Britain, Denmark and Sweden, for their own reasons, have not yet adopted the common currency.
The accession of Cyprus to the Euro-zone is one of the basic objectives of the Cyprus Government. The first step has already been made with the accession of the Cyprus pound to the Mechanism of Parity of Exchange 2 (the Cyprus pound can diverge from the parity 1 Euro: 0,585274 pound +15%, instead 2,25% as it was until to day, a fact which creates the preconditions for the stabilisation of the Parity Exchange of the Cyprus pound until the adoption of Euro).
The Euro will most probably be adopted in Cyprus on 1.1.2008.
In order for a country to join the Euro – zone it should satisfy the Convergence criteria provided by the Maastricht Treaty of 1992.
The criteria are the following:
1. The rate of inflation should not be higher than 1.5 percentage units above the average inflation of the three countries with the lowest inflation.
2. The percentage of the long –term rate of interest should not exceed 2% of the average of the rate of interest of the countries which have the best performance.
3. The Financial deficit as percentage of the GDP should not exceed 3%.
4. The Public Debt as percentage of the GDP, should not exceed 60%.
5. Stability in the Parity of Exchange.
On the present available data, Cyprus satisfies the criteria of
- Inflation– 2.2% against 2.4% of the convergence criteria.
- The Financial Deficit – 2.9% of the GDP against 3% of the criteria.
Whilst on the contrary Cyprus does not satisfy the criteria of
- Public debt – 68.8% against 60% of the criteria
- Long-term rate of interest – 5.87% against 5.66% of the criteria.
Irrespectively of any disagreement regarding the year of accession to the Euro-zone (there are views supporting that the date can be postponed so that there is no oppressive pressure for the implementation of the criteria – something which could mean slow-down of the rate of growth and strict austerity), this development will be an important challenge for the Cyprus economy, a challenge regarding the repercussions due to this development on the working people and generally on every Cypriot citizen.
There are positive and negative elements for the implementation of Euro.
The positive elements are the following:
- The common currency will reveal the costs which the bad economic policies impose on the society and on the consumers. The consumers will be able to compare the prices of the goods and services taking advantage of the transparency offered by the common currency. This development will generate the increase of the competition among the enterprises.
In this way a Cypriot who visits countries which have adopted the Euro, will be able to compare the prices of the various products and proceed to those purchases financially most favourable to him.
- The consumer (households, enterprises) will be benefited from the elimination of the cost of the conversion of the Cyprus pound into Euro.
- Reduction of interest rates.
- Creation of more favourable lending conditions from the public and private sectors.
The important negative element for all the countries which adopt the Euro is the fact that the common currency imposes a unified monetary policy.
Taking into account the narrow limits provided by the Stabilisation Treaty for the public Finances of the member-countries, the Governments have very limited margins to exercise financial policy.
Furthermore, there is a reasonable fear, that with the implementation of Euro by Cyprus the prices will increase, as it happened in some countries when they adopted Euro.
This is why in these cases the rounding of the prices is usually made upwards. In this case the Government should be alert and timely inform the citizens and intervene where unjustified increases of prices may happen.
We must also note that the best monetary homogeneous area will lead to an increase of competition and will succeed the mergers and acquisitions among the European Enterprises which in their turn will have as a result the reduction of employment opportunities,(this may occur to Cyprus enterprises).
Sooner or later Cyprus will enter the Euro-zone. We know that a Consultative Committee has been established for the adoption of Euro in Cyprus and this is a positive step. In this Committee all the organised institutions will have the discretion to express their fears and concerns and press towards the direction of taking preventing measures, which will render smooth adoption of Euro.
The experiences of other countries can help in avoiding mistakes and omissions. For this reason these experiences should be carefully examined.