Cyprus’ adoption of the euro and accession to the EMU as of 1 January this year is without doubt the most important achievement of the Republic of Cyprus since its accession to the EU four years ago. It is a development that is expected to have far reaching economic, social and political repercussions.
The process of transition to the euro has been smooth without posing any significant obstacles. The government patiently and consistently pursued a prudent fiscal policy without upsetting social fundamentals and parameters. This policy in conjunction with satisfactory GDP growth rates paved the way for nominal convergence with the Maastricht criteria; the fiscal deficit, the public debt and all relevant criteria were brought to levels consistent with nominal convergence. Although this was important, much remains to be done for real convergence in the years ahead.
Before accession to the eurozone price increases had been recorded on most consumer items. This was hardly a surprise since it has been experienced in other countries as well. Increases in the price of crude oil and of other important inputs which coincided with the adoption of the euro sustained an upward pressure on prices. However, with the imminent introduction of the euro the government had put in place a monitoring mechanism to prevent unduly price increases and so far excesses were contained. In any case, in the long run the adoption of the euro will further enhance competition. Within this framework consumers will be able to compare prices and excessive mark-ups will be contained.
Perhaps more importantly, participation in the eurozone will enable Cyprus to embark on a process of necessary reforms. The objective will be to achieve real convergence and also contain the public and broad public sector. In the new era public expenditures will require stricter evaluation and taxpayers’ money would need to be utilized more efficiently. This will be in line with the need for sustained restraint in relation to public spending.
At the same time Cyprus must attract additional foreign investment which will be useful in the process of broadening its economic base. A fundamental objective is to turn Cyprus into a regional business, academic and medical center. Accession to the eurozone will contribute toward this direction since it will prompt additional reforms and changes in these and closely related sectors. The financial sector will continue to go through a process of further modernization while more flexibility will eventually prevail in the labour market.
For any member state the adoption of the euro is an important milestone. In the case of Cyprus it has an additional importance: as the country tries to achieve real convergence with the EU in all aspects, it will also have to rise to the challenge of reunification.** If one considers the record of bi-communal negotiations in relation to monetary matters they will find out that over time the Turkish-Cypriot side had repeatedly insisted on the need for the establishment of separate Central Banks and on a new neutral currency for the federal state. With the accession of Cyprus to the eurozone, these issues are redefined. And as of January 1, 2008 the national currency is the euro and monetary policy is the sole responsibility of the European Central Bank. Indeed, the euro has the potential to prove, and the capability to be, in addition to a strong currency, a unifying tool, economically, socially and politically.
The introduction of the euro inevitably calls for a more unified political and economic structure in Cyprus, in case of a solution. This has clear implications: if a unified Cyprus is to meet its obligations as a member of the EMU it must follow uniform and consistent economic policies. This requires coordination and cooperation. Obligations aside one should also consider the rising aspirations of young Cypriots on both sides of the UN buffer zone. Obviously a dynamic and integrated economy is needed for more jobs and opportunities to be created.
Crucially accession to the eurozone has also eliminated the fear of the exchange rate risk. It had been thought that the increase of public spending associated with reunification could have placed the Cyprus pound under pressure. This risk no longer exists.
All these issues must receive their fair share of attention by the political and business leaders of both communities in Cyprus. Obviously, the euro can prove to be the catalyst for new thinking in relation to the reunification of Cyprus.
** For interesting reading see A. Theophanous and Y. Tirkides (Eds), Accession to The Eurozone and the Reunification of the Cyprus Economy, (Intercollege Press, Nicosia 2006).