The successful entry of Cyprus into the euro area

Ladies and Gentlemen,

It is a great pleasure for me to attend this conference celebrating your adoption of the euro. Let me first congratulate all parties involved in the successful cash changeover that took place at the beginning of the year. It has been going smoothly. None of this would have been possible without the excellent performance of the Cypriot economy during the convergence process.

1. Cyprus’s economic achievements on the way to the euro [1] Today’s euro celebrations are the result of the successful macroeconomic policies that the Cypriot authorities have pursued in recent years. Cyprus has made significant progress in both nominal and real convergence, owing to successful policies – namely, well-managed monetary and exchange rate policies combined with a range of structural reforms. In the last decade, HICP inflation in Cyprus has been contained, averaging 2.2% in 2007, with the only exceptions being in 2000 and 2003, when inflation rose mainly because of increases in energy prices as well as VAT harmonisation. Short-term as well as long-term interest rates have followed a declining trend in recent years to levels in line with those of the euro area as a whole. This suggests that market participants have confidence in Cyprus’s macroeconomic and fiscal developments as well as in its monetary and exchange rate policies. The process of nominal convergence has been accompanied by robust economic growth. Real GDP growth in Cyprus has been well above that in the euro area in recent years. Real output growth has been underpinned by domestic demand, and in particular by strong private consumption and, importantly, by strong fixed capital formation. Cyprus’s GDP per capita (in PPP terms) progressed from around 74% of the 1996 average of the 12 countries which initially joined the euro area to around 84% in 2006: this is a significant improvement, and may it continue that way. In spite of its remarkable progress towards nominal and real convergence, Cyprus has not experienced major imbalances: price and cost competitiveness developments have been favourable since 2004. The fiscal balance (the deficit-to-GDP ratio) has been improving since 2004 and stood at -1.2% of GDP in 2006. Looking at the financial side, Cyprus is experiencing substantial financial deepening, which has been reflected in robust credit activity. Although this process accompanies and supports economic development, it should be carefully monitored, particularly because it is taking place at a very rapid pace. Membership of the Exchange Rate Mechanism II (ERM II) was another element in Cyprus’s successful convergence. The pound-euro exchange rate at which Cyprus joined the ERM II in May 2005 remained very stable throughout the period of ERM II participation. The EU Council decided that the central parity should also become the final conversion rate of the pound to the euro.

2. Cooperation between the Central Bank of Cyprus and the ECB Let me also say that the ECB has established excellent working relations with the Central Bank of Cyprus over the last couple of years. The Governor of the Central Bank of Cyprus has been a member of the General Council of the ECB since May 2004. As from mid-2007, Governor Orphanides attended the meetings of the Governing Council as an observer, and on 1 January 2008 he became an official member of that decision-making body for monetary policy in the euro area. The ECB and the Central Bank of Cyprus, together with the National Changeover Board, the European Commission and national and international authorities cooperated closely in many ways to prepare the introduction of the euro. The euro information campaigns played a vital role here. The ECB together with the Central Bank of Cyprus made sure that Cypriots became familiar with the euro banknotes and coins. The information campaigns consisted of an optimal communication mix that drew on the experience of the communication campaign in 2002, when euro cash was introduced in 12 countries, as well as the campaign for Slovenia prior to its joining the euro area in 2007. It included public opinion polls, advertising and direct marketing. Over 900,000 copies of different publications were distributed by the Central Bank of Cyprus - this is more than one copy per Cypriot! The aim was to enable everyone in Cyprus to check their new euro banknotes: every household received euro banknote ‘cards’, the same size as a credit card. They show the three main security features of the €50 and €20 banknotes and how to check them. As a result of these efforts, today we can celebrate a successful cash changeover. I am sure that the excellent relationship between the Central Bank of Cyprus and the ECB will grow even stronger, now that the central bank is a member of the Eurosystem. Indeed, intimate cooperation between the members of the team, the national central banks of the Eurosystem, and the ECB is the key for the success of the single monetary policy in the euro area.