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Cyprus: Final convergence hurdle cleared


According to the Commission, Cyprus has achieved a high degree of sustainable economic convergence and is ready to adopt the euro in January 2008. Already in its December 2006 convergence report, the Commission concluded that Cyprus met three convergence criteria.

A remaining task in the run-up of this Commission report was to remove all outstanding incompatibilities with the requirements of EU law. In March 2007, the Cypriot Parliament passed the Law enacting the necessary amendments to the Central Bank of Cyprus Laws to ensure full compliance.

Economic criteria: No surprises

As for the economic criteria – there were no real surprises: The reference value for the average inflation rate has been respected since August 2005, the Commission concludes in its Convergence Report. During the 12 months to March 2007, inflation was at 2.0% (reference value: 3.0%).

The evolution of public finances shows a continued positive trend and is in line with the budgetary strategy approved by the Ecofin Council. According to the Commission's Spring Forecast, public deficit is at 1.4% of GDP in 2007 and public debt at 61.5% of GDP, with the latter clearly in decline.

Exchange and interest rates are also in line with the Maastricht criteria. Since May 2005, the Cyprus pound has successfully participated in the exchange rate mechanism (ERM II), without experiencing severe fluctuations. Average long-term interests have been below the reference value (currently at 6.4%) since November 2005.

Who decides the conversion rate – and how?

The Commission plans to propose a conversion rate for the Cypriot pound into euro in June. The formal decision is taken by the finance ministers on 10 July.

Euro adoption: What are the benefits?

Cypriots will especially benefit from historically low interest rates currently enjoyed by euro area members. Citizens and businesses will be able to borrow money cheaply. Members of the euro area also enjoy low inflation and a stable economic that fosters business activities and job creation. With the disappearance of exchange rate costs, Cyprus's attractiveness as a tourist destination will be enhanced.

Does the euro increase prices?

Before the euro, inflation had never been so low in so many countries and for such a long period of time. The changeover process in 2002 and more recently, this year, when Slovenia became member of the euro area is estimated to have increased prices by an additional 0.1 to 0.3 percentage points. So if the average price rise was € 2.30 for a € 100 basket of purchases, then no more than thirty euro cents of this increase was due to the euro.

When the Maastricht Treaty was politically approved by the Heads of State or Government at the European Council in Maastricht in 1991, the average inflation rate in the euro area was around 4%. Since the start of the third stage of  the economic and monetary union (EMU) on 1 January 1999, annual inflation in the euro area – as measured by the harmonised index of consumer prices (HICP) – averaged 2.2%.

What happens if and when Cyprus is reunited?

In case a reunification occurs after the Republic of Cyprus has adopted the euro, the areas currently not under the effective control of the government of the Republic would automatically shift to the euro as part of a united, single state of Cyprus. Cyprus would simply expand its jurisdiction or territory, together with its legal system and its international obligations, both of which include the Community acquis. The adaptation of the legal framework and the practical aspects of the changeover will have to be worked out as part of the reunification process.

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