CYPRUS PASSES LEGISLATION FOR JOINING EUROZONE

UNCLAS NICOSIA 000247 SIPDIS SENSITIVE SIPDIS E.O. 12958: N/A TAGS: EFIN ECON EUN CY SUBJECT: CYPRUS PASSES LEGISLATION FOR JOINING EUROZONE REF: (A) NICOSIA 144, (B) 06 NICOSIA 2033 (U) This cable is sensitive but unclassified. Please treat accordingly. ¶1. (SBU) Summary. On March 15, Cyprus adopted four bills establishing the legal framework for the adoption of the Euro on January 1, 2008. Cyprus is currently well-positioned to meet the Maastricht criteria and receive the final clearances this summer from EU authorities to take this historic step. The run-up to the vote was not without political drama as Cyprus's two largest parties traded barbs, with the communist AKEL party breaking with the government coalition to oppose the bills and the opposition DISY -- a strong Euro supporter -- suddenly hedging. In the end DISY relented, and the bills easily passed. The GOC has now begun a national action plan to try to address continuing public fears that Euro adoption is likely to cause significant price increases. End Summary. ¶2. (U) On February 15, 2007, the Cypriot House of Representatives passed four bills preparing the ground for the adoption of the Euro on January 1, 2008. The four bills create the legal framework for the transition from the Cyprus Pound (CYP) to the Euro. They provide for the parallel circulation of the CYP and Euro for a month after the changeover, the dual pricing of goods in both currencies beginning in August and lasting through June 2008, and the exchange of pound notes and coins into Euros. The most important provisions of the first bill are the following: -- The exchange parity for the conversion from the CYP to the Euro will be set in July 2007 (most likely, in the first ten days of July). -- Dual pricing (in both CYP and Euros) will be mandatory beginning one month after the rate is set and lasting through June 2008. Exceptions cover small-ticket items, such as bus fares, electronic pricing systems, parking meters, pre-paid phone cards etc. Generally, exceptions to mandatory dual pricing are permitted when the cost of dual pricing is so high that there is a real risk it will be transferred onto consumers. -- Both the CYP and Euro will circulate legally for a month after the introduction of the Euro (January 1-31, 2008). -- Commercial banks will be obliged to exchange CYP into Euros without any charge for six months after January 1, 2008, but with a 1,000 Euro per person limit per transaction for banknotes and a 50 Euro per person limit for coins. The Central Bank will be obliged to exchange CYP to Euro free of charge with no limits for ten years. -- "Euro Observatories" will be created to check up on exchange rates and prices. Civilians will be able to report offenders to these bodies. -- Fines of up to CYP 100,000 (USD 220,000 or 170,000 Euro) are provided for anyone violating these laws, including any retailers who try to profiteer from the switchover by hiking up prices. -- Post-dated checks in CYP will not be valid after adoption of the Euro. -- Companies will have one year from the adoption of the Euro to convert their share capital to Euros, with the approval of their general assembly. -- CYP-denominated duty stamps can be exchanged for a month after adoption of the Euro. -- CYP-denominated postage stamps can be exchanged for a year after the introduction of the Euro. ¶3. (U) The other three bills amend provisions in existing Cypriot legislation concerning the function of the Central Bank of Cyprus vis-a-vis the ECB, making it compatible with the EU acquis. These amendments shift the responsibility for forming and enforcing monetary policy from the Central Bank of Cyprus to the ECB, while noting that the Central Bank of Cyprus will contribute to the formation of the EU monetary policy through its participation in EU bodies. They also amend the legal framework for the auditing of the Central Bank of Cyprus. The office of the ROC Auditor General, an independent (albeit not external) body, will continue auditing the Central Bank, provided it will not interfere with its independence and the duties assigned it by the European System of Central Banks. ¶4. (U) EU Economic and Financial Affairs Commissioner Joaquin Almunia welcomed Cyprus' approval of the four bills noting that it was a positive development. DG ECFIN, and the European Central Bank are currently assessing the Cypriot economy based on the Maastricht criteria. If current trends continue, Cyprus should meet all the relevant criteria. It is expected that the final decision to allow Cyprus to join the EMU could be taken at the June 21 and 22 European Council meeting in Brussels. ¶5. (U) Meanwhile, the GOC has hired an advertising firm and finally launched a National Action Plan to educate the public on the Euro. The plan aims to secure the active participation of every citizen, consumer, household and business for a smooth transition to the new currency. The launch of the campaign had been delayed for several months after the Supreme Court overturned the original award among accusations that the Finance Ministry had violated tender procedures. Polls suggest that around 50 percent of Cypriots remain worried that the changeover to the Euro will lead to significantly higher prices. ¶6. (U) Finance Minister Sarris also welcomed the vote, noting that Cyprus had entered the final stretch in the race for adoption of the Euro. Sarris also noted that the GOC is considering favorably a proposal backed by all parties to postpone by at least six months the planned January 1, 2008 increase of VAT on certain items from 15 to 18 percent. The goal of the postponement would be to ensure that the VAT increase does not politically hurt support for the Euro by creating the impression that the Euro's adoption was linked to price rises. ¶7. (SBU) The bills were approved on March 15 during an unusually calm session of the House, with a comfortable 36 to 15 votes. The dissenting votes belonged to communist AKEL, which insisted that it would be best to postpone adopting the Euro for another year, ostensibly to allow the state more time to cushion lower-income groups from the negative impact of the changeover. AKEL maintained this position even as it continued to participate in President Papadopoulos' ruling coalition. Despite its negative vote, AKEL offered assurances that it would cooperate with the government in trying to alleviate any negative repercussions from the changeover. ¶8. (SBU) Nevertheless, for a few tense days the week before, approval of the four bills hung in the balance. Without AKEL's support, the government became dependent on the votes of the center-right opposition DISY party -- which had long been a strong proponent of adopting the Euro. In an apparent attempt, however, to try to highlight the divisions within the government coalition and to distance itself from responsibility for any problems that might occur during the transition, DISY announced its support could not be taken for granted. Only after receiving assurances from Papadopoulos and Sarris that the GOC would do everything it could to ensure a smooth changeover, did DISY relent, but not before damaging some of its credibility with the business community. ¶9. (SBU) Comment: With the passage of the bills, Cyprus has now cleared its last internal hurdle separating it from adopting the Euro next year. Barring a strong external shock, after several years of impressive fiscal discipline, Cyprus is set to meet all the Maastricht criteria and gain the necessary EU approval. Cyprus's main challenge will be to ensure a smooth transition among strong domestic fears that some of the hiccups that occurred during the changeover in Greece are inevitable. Cyprus has been slow off the block in preparing its public for the changeover and its political parties have fanned many of the public's fears. It is not too late, however, for Cyprus to ensure that it gets the transition right -- there are plenty of good and bad examples to learn from -- but it would be well advised not to wait until the last minute. End comment. SCHLICHER