Almunia warns Cyprus of inflationary perceptions regarding euro adoption

NICOSIA (Reuters) – European Union member Cyprus, which entered the ERM-2 proving ground for the euro last month, must tackle popular perception that adoption of the euro will boost inflation, EU Commissioner Joaquin Almunia said. Almunia said he was concerned about the results of the latest Eurobarometer poll, which showed 72 percent of Cypriots feared a switch to the euro would lead to price cheating and 59 percent thought the euro would harm price stability. «These figures show a need for action,» Almunia said in a speech. «We should address the unfortunate but real possibility of price increases in certain, generally well-defined, sectors.» Almunia is commissioner for monetary and economic affairs. He said commitments to price stability should be negotiated in advance with the retail sector and could be manifested by special stickers in window shops. There was widespread criticism by consumer groups, especially in Italy, that the changeover to the euro at the start of 2002 led to higher prices. Cyprus expects to join the single currency in 2007 or 2008 once its brings its debt and budget deficit below the EU maximum thresholds of 60 percent and 3 percent of gross domestic product respectively. Cyprus had a budget deficit of 4.2 percent of GDP in 2004 and the European Commission forecast in April this would be cut to 2.9 percent already this year. The country’s debt is seen easing to 69.1 percent of GDP this year from 71.9 percent in 2004 and then further to 66.6 percent in 2006. «There is no time for complacency and I am sure that the government will continue to implement its convergence program with vigor and determination,» Almunia said. «This would help you bring down the relatively high public debt to GDP ratio as planned,» he said. Almunia said that the government’s commitment to public finance consolidation would also help drive down yields on bonds.