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Towards adoption of the euro in 2008: Cyprus and Malta
The European Commission gave the green light for Cyprus and Malta to introduce the Euro in 2008. In the following reports, the Commission confirms that the two Mediterranean islands satisfy the convergence criteria for introducing the single currency. The final decision was taken by European Union Finance Ministers at the ECOFIN Council meeting on 10 July 2007. (PDF )
Report from the Commission of 16 May 2007: Convergence Report 2007 on Cyprus, prepared in accordance with Article 122(2) of the Treaty at the request of Cyprus [COM(2007) 255 final - not published in the Official Journal].
Report from the Commission of 16 May 2007: Convergence Report 2007 on Malta, prepared in accordance with Article 122(2) of the Treaty at the request of Malta [COM(2007) 258 final - not published in the Official Journal].
The European Commission concludes in these convergence reports, prepared at the request of Cyprus (13 February 2007) and Malta (27 February 2007), that the two Member States fulfil the "convergence criteria" for being able to introduce the euro as from 1 January 2008. It therefore proposes to the Council of the European Union that a decision be adopted accordingly.
Determining the state of convergence: the Treaty provisions
The convergence criteria are listed in Article 121(1) of the Treaty establishing the European Community (EC Treaty). They are set out in more detail in the protocol on the convergence criteria. The criteria relate to:
- price stability: a sustainable degree of price stability and an average rate of inflation, observed over a period of one year before the examination, that does not exceed by more than 1.5 % that of the three best-performing Member States in terms of price stability;
- government budgetary position: absence of excessive deficit (reference value: 3 % of GDP) and public debt in line with the reference value of 60 % of GDP;
- exchange rate stability: the national currencies have for two years kept within the fluctuation margins provided for by the exchange-rate mechanism of the European Monetary System (EMS II) without experiencing severe tension and without devaluation against any other Member State's currency;
- long-term interest rates: a long-term interest rate that does not exceed by more than 2 % that of the three best-performing Member States in terms of price stability.
In addition, national legislation, including the statutes of the national central banks, must be compatible with the requirements of the EC Treaty and the Statute of the European System of Central Banks (ESCB ).
Applying the convergence criteria to Cyprus and Malta
The reference value for inflation (price stability) was fixed at 3 % in March 2007, with Finland, Poland and Sweden the three Member States posting the best results.
Cyprus. Cyprus' 12-month average inflation rate has been below the reference value since August 2005. In March 2007, the average rate was 2.0 % - well below the 3 % reference value. In addition, according to the Commission's spring 2007 forecast, the 12-month average inflation rate in Cyprus will fall to 1.3 % in December 2007, against a reference value of 2.8 %. Government debt followed an upward trend between 2000 and 2004 but has been on a declining path since 2005. It decreased to 65.3 % of GDP in 2006, and according to the Commission services' Spring 2007 Forecast, will continue to decline in 2007, reaching some 61.5 % of GDP. Cyprus thus satisfies the price stability criterion.
Malta. The 12-month average inflation rate has been around or below the reference value since July 2005, apart from the period between May and October 2006. In March 2007, the average rate was 2.2 % - well below the reference value of 3 %. The Commission forecasts that average inflation in Malta will fall to 1.4 % in December 2007. Malta thus satisfies the price stability criterion.
To be able to introduce the euro, a country has to have a budgetary position without an excessive deficit.
Cyprus. At the time this report was written, Cyprus was no longer the subject of a Council decision on the existence of an excessive deficit. Its deficit peaked at 6.3 % of GDP in 2003, but since then it has shrunk considerably and stabilised at 1.5 % of GDP. Forecasts for 2007 are for it to remain steady at 1.4 % of GDP. Cyprus therefore satisfies the criterion on the government budgetary position.
Malta. At the time this report was written, Malta was the subject of a decision on the existence of an excessive deficit [Council Decision 2005/186/EC of 5 July 2004 - Official Journal L 62 of 9.3.2005]. From a peak of about 10 % of GDP in 2003, the budget deficit fell considerably to 2.6 % of GDP in 2006. According to Commission forecasts, it will represent 2.1 % of GDP in 2007. The Commission believes that the excessive deficit has been corrected in a credible way below the 3 % threshold and that the debt ratio (66.5 % of GDP in 2006) is coming down towards the reference value of 60 % of GDP (65.9 % of GDP forecast for 2007). As a result, it recommends that the Council repeal the decision on the existence of an excessive deficit in Malta. The Council halted the excessive deficit procedure against Malta at its meeting of 5 June 2007 [PDF ].
As regards the criterion on exchange rate stability, Member States have to have participated in the European exchange rate mechanism (ERM II) for at least two years without experiencing severe tension.
Cyprus. The Cyprus pound has participated in the European exchange rate mechanism (ERM II) since 2 May 2005. Over these two years, it has always been in the upper part of the fluctuation margin, close to the central rate, and has not seen significant fluctuations.
Malta. The Maltese lira has been part of the European exchange rate mechanism (ERM II) since 2 May 2005. Over these two years, it has been stable against the central rate and has not experienced severe tension.
In March 2007, the reference value for the long-term interest rate was fixed at 6.4 %.
Cyprus. The average long-term interest rate was 4.2 % over the year ending in March 2007. Average long-term interest rates have been below the reference value since November 2005. Cyprus satisfies the convergence criterion on long-term interest rates.
Malta. The average long-term interest rate was 4.3 % over the year ending in March 2007. Average long-term interest rates have been below the reference value since accession to the European Union in May 2004. Malta satisfies the convergence criterion on long-term interest rates.
In addition, national legislation in Cyprus and Malta, particularly as regards the national central banks, is compatible with the requirements of the EC Treaty and the ESCB statutes.
"Thumbs up" for the introduction of the euro in Cyprus and Malta
In the light of its evaluation of the country's compliance with the convergence criteria, the Commission gives its "thumbs-up" to the introduction of the euro in Cyprus. The same applies to Malta, subject to the Council following the Commission's recommendation to end the excessive deficit procedure. The Council did so at its meeting of 5 June 2007. [Council Decision of 5 June 2007 abrogating Decision 2005/186/EC on the existence of an excessive deficit in Malta - OJ L 176 of 6.7.2007].
The report on Cyprus looks only at the areas in which the Government of the Republic of Cyprus exercises effective control, as defined in Protocol No 10, annexed to the 2003 Act of Accession.
For further information on the above, please visit the website of the Commission's Directorate-General (DG) for Economic and Financial Affairs: