ECONOMY

Cyprus, Malta to become eurozone’s new members

BRUSSELS – Cyprus and Malta cleared the final hurdle yesterday to joining the eurozone on January 1, 2008, when EU finance ministers set the rates at which the single currency will replace their pound and lira respectively. «It’s an historic day for us. It’s a new beginning,» Cypriot Finance Minister Michalis Sarris told reporters, vowing to keep tight fiscal discipline once his country adopts the currency now shared by 13 nations, including Greece. Maltese Prime Minister Lawrence Gonzi declared, «This is an historic moment for Europe, for the eurozone and for Malta.» The EU’s 27 ministers decided the Cyprus pound would be replaced at a rate of 0.585274 pounds per euro as expected and that 0.429300 Maltese lira would be worth 1 euro. Those rates are the same as their central parity levels in the Exchange Rate Mechanism II, the currency stability test for joining the euro, in which the two Mediterranean islands’ currencies have been stable over the last two years. The two countries will be the second and third new member states to adopt the euro among the 10 that joined the bloc in 2004. The first, Slovenia, entered the club on January 1 this year. Cyprus and Malta will add 1.2 million citizens and 0.2 percent to the eurozone’s 8-trillion-euro economy. Their main industry is tourism. «I congratulate Cyprus and Malta,» said Portuguese Finance Minister Fernando Teixeira dos Santos, whose country now holds the EU’s rotating presidency. «I expect that the adoption of the euro in these two countries will encourage them to keep with such policies and also to keep the soundness of their economy and improve the competitiveness of their economies,» he added. In the ERM II, the currencies of euro candidates are allowed to fluctuate within a margin around a central parity rate. Since both currencies were stable in the ERM II, the chosen conversion rate will not have any impact on their economies. Criteria Cyprus and Malta were invited to join the euro after meeting tough criteria on inflation, interest rates, budget deficits, public debt and foreign exchange stability. The next in line is Slovakia, which wants to join in 2009, but a European Central Bank memo obtained by Reuters last month posed a question mark over its ability to keep inflation in check. The biggest EU newcomers – the Czech Republic, Hungary and Poland – are likely to adopt the currency only after 2010 due to their high budget deficits. Political dimension Sarris has repeatedly said Cyprus’s euro adoption should help in any future talks on reunification between Greek Cypriots, who represent the divided island in the EU, and Turkish Cypriots, whose breakaway state in northern Cyprus is recognized only by Turkey. «There will be no discussion which currency will be the common currency of the reunified Cyprus so it will take away one of the issues on the table,» he told Reuters last month. Gonzi said Malta was doing all it could to avoid a spike in inflation or perceived inflation when the euro is introduced, but was still vulnerable to imported price rises. «We are confident that we have taken all the steps domestically,» he said. «We are already slightly concerned about what is being discussed in international fora about cereal prices… and stagflation.»