Cyprus appears to have passed the final Maastricht test in what could be the last inflation report before the country’s European partners consider whether Cyprus has met all the Maastricht criteria for adopting the euro.
The EU-harmonised consumer price index in April rose by 1.6% compared with April 2006, slightly higher than the 1.3% recorded in March.
However, the all-important 12-month rate fell slightly, to 1.9% compared with 2.0% in March.
In order to meet the Maastricht inflation criterion, the 12-month harmonised inflation rate in Cyprus must be no more than 1.5 percentage points above the average 12-month harmonised inflation rates in the EU countries with the lowest inflation figures.
In March (latest available data), these were Finland at 1.2%, Poland at 1.5% and Sweden and the Netherlands, both with 1.6%. This yields an average of 1.4% and thus a Maastricht target of 1.4% + 1.5% = 2.9%.
If the 12-month EU rates for April are the same as in March, Cyprus will have met the criterion with a full 1% of leg room.
On May 2nd Cyprus passed its two-year anniversary within the Exchange Rate Mechanism (ERM2). Eurozone member states as well as the Commission and the European Central Bank will now consider whether Cyprus has fulfilled all four Maastricht criteria on inflation, exchange rates, fiscal performance and interest rates.
A country must spend at least two years within ERM2 without devaluation or serious currency fluctuation in order to meet the criterion on exchange rates.
This requirement has already been met. The maximum shift in the rate of the Cyprus pound against its central parity rate within the euro (0.585284 per euro) since 2005 has been 2% but even then, the pound was stronger than the central parity rate. Today the pound is much closer, at just 0.4% above the central parity rate.
The two other criteria relate to fiscal performance and interest rates. The budget criterion was met in 2006 with a general government deficit of only 1.5% of GDP (the threshold is 3%) and the public debt criterion will probably be deemed to have been met because the debt/GDP fell from 69.2% of GDP to 65.3%, even if it was not below the ideal 60% threshold.
Long-term interest rates have long been within range. So that leaves only the nagging Greek Cypriot worry that someone out there will use the decades-old Cyprus problem as an excuse to veto Cyprus.
The Cyprus problem complicates EU business in all kinds of unrelated areas and Greek Cypriots currently take most of the blame for lack of progress in solving the problem.
Germany quashed rumours last month that it would veto Cyprus by confirming that Cyprus would be judged in accordance with the treaty rules. But rumours popped up again that a veto could come from another quarter.
Source: Financial Mirror
