Cyprus will apply to join ERM-2 in May, central banker says

FRANKFURT (Reuters) – Cyprus, which joins the European Union on May 1, will apply in May for the EU’s currency mechanism and plans to cut its deficit over the next two years to ready itself for the euro, its central bank governor said yesterday. In an interview with Reuters, Cypriot central banker Christodoulos Christodoulou said if everything went smoothly, he would anticipate Cyprus yoking its currency to the euro in the Exchange Rate Mechanism (ERM-2) by June or July. «After May 15 and before the end of the month, we shall make an application. The unofficial contacts have already started and there will be unofficial consultations in the months before May 1,» Christodoulou said after attending a European Central Bank General Council meeting of EU central bankers and newcomers. Cyprus sees little downside to membership of ERM-2, in contrast to central banks of some of the other nine acceding countries, who worry that the rules for exchange rate stability may prove a burden to monetary and fiscal policies. «Once we enter into ERM-2, we shall be in a much better position to support our currency,» Christodoulou said. However, the path toward euro membership is not completely free of obstacles, he said, noting the country had a high budget deficit of around 6 percent and a debt above 60 percent of gross domestic product. To enter the eurozone, states must show that they have achieved healthy, sustainable public finances, with deficits below 3 percent and debt under or approaching 60 percent of GDP. Christodoulou said Cyprus should be able to turn public finances around if the political will was there. «In two years’ time, we will be in a position to have a fiscal deficit of 3 percent, once we decide to do it and show political determination. The economy can afford it.» Cyprus aims to adopt the euro by 2007. The Cypriot pound has shown great stability over the past 12 years in its informal peg against the European Currency Unit and later the euro. Economic studies show the equilibrium exchange rate of its pound is around 1.7086 euros, Christodoulou said. «For 12 years, we have not exceeded fluctuation beyond a narrow band of 2.25 percent. This is a very sound element that proves the existing parity between the Cypriot pound and the euro is the correct one,» he added. The Cypriot pound was trading at 1.7094 euros yesterday. Like the other EU newcomers, Cyprus is required to join the ERM-2 exchange rate stabilization system for at least two years before adopting the euro.