Cyprus fulfills fundamental convergence criteria for adopting euro
Brussels, Dec 5 – Cyprus fulfills all fundamental convergence criteria for adopting the euro, according to the Convergence Report which Commissioner for Economic and Monetary Affairs Joakim Almunia made public in Brussels on Tuesday.
It is the second ''regular'' report since the enlargement of the EU to 10 new Member States in May 2004.
In the 2004 Convergence Report, the Commission assessment was that Cyprus fulfilled two of the convergence criteria (on price stability and long-term interest rates). The assessment on legal convergence concluded that legislation in Cyprus was not fully compatible with Article 109 of the Treaty and the ESCB/ECB Statute.
The report said that no national legislation has been enacted so far resolving the legal convergence issues identified in the 2004 Convergence Report. However, a draft Law amending the Central Bank of Cyprus Law of 2002 and 2003 was submitted to Parliament on 12 October 2006 in order to address these issues and to ensure full compatibility with the Treaty and the ESCB/ECB Statute.
In its present form, this draft Law removes all incompatibilities raised in the Convergence Report of 2004.
The report indicates that Cyprus has traditionally enjoyed relatively low, although at times volatile, inflation, reflecting the sensitivity of its small and open economy to external price shocks.
The average inflation rate in Cyprus during the 12 months to October 2006 was 2.3 percent, below the reference value of 2.8 percent, and it is likely to remain below the reference value in the months ahead. Cyprus fulfils the criterion on price stability, it said.
Furthermore, the report noted that Cyprus is at present not the subject of a Council decision on the existence of an excessive deficit.
According to Mr. Almunia’s report, expenditure growth was restricted by the imposition of a ceiling on the nominal growth rates of current primary and capital expenditure, a policy which has been continued in subsequent budgets. Government debt decreased to 69.2 percent of GDP in 2005. Cyprus fulfils the criterion on the government budgetary position.
The Cyprus pound has participated in ERM II since 2 May 2005, i.e. for 19 months at the time of adoption of this report and has not completed two years in the ERM II. Since its entry, the pound has remained close to the central rate and has not experienced severe tensions. The report indicates that Cyprus does not fulfil the exchange rate criterion.
Mr. Almunia’s convergence report also stressed that the average long-term interest rate in Cyprus in the year to October 2006 was 4.1 percent, below the reference value of 6.2 percent and thus Cyprus fulfils the criterion on the convergence of long-term interest rates.