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Malta And Cyprus To Adopt Euro In 2008

by Ulrika Lomas, Tax-News.com, Brussels

15 May 2007


The European Commission is tomorrow expected to give the green light for Malta and Cyprus to adopt the European single currency from January 1, 2008.

According to the Times of Malta, which has seen a draft EC report on the two member states' convergence progress, Malta will be given the go-ahead to enter the eurozone because it has "sufficiently converged towards EU levels according to the criteria set in the EU Treaty to adopt the euro on January 1, 2008". Cyprus is also expected to receive approval for similar reasons, after Nicosia sent its application to join the eurozone to European Central Bank President Jean-Claude Trichet and European Monetary Affairs Commissioner Joaquin Almunia in March.

Commission sources told the Times that Brussels is "really impressed" with the progress of the Maltese economy and the way that the island's government has handled the public finances during the convergence programme. Malta's budget deficit has fallen below 3% of GDP from a high of 10% just three years ago, meaning that it meets the basic criteria for joining the euro as stipulated by the Growth and Stability Pact.

Malta's convergence programme foresees growth in the country's gross domestic product of 3% in 2007, rising to 3.1% in 2008 and 2009. However, this is markedly more optimistic than the programme's forecasts in January 2006, which predicted GDP growth of 1.2% in 2007, rising to 2% in 2008. The European Commission also expects more moderate growth, and its autumn 2006 economic forecast predicted GDP expanding 2.1% this year and 2.2% in 2008.

Under normal procedure, a decision on the applications is expected to be made at an Ecofin meeting in Brussels in June, which would then be ratified by the EU Heads of Government; the two currencies will then be locked permanently to the euro in July.

In its annual review of Cyprus, the Economist Intelligence Unit (EIU) has revised down its forecast for Cyprus’s growth to 3.4% (from 3.6%) in 2007, and to 3.6% (from 3.8%) in 2008. Growth is expected to remain substantially flat over the next few years. However, the EIU sees the island's low-tax environment and its location as its main attractions for investors, together with its regulatory reliability as an EU member state, although the local market is small, and labour costs are high relative to other countries in the region.

“Our baseline assumption is that the budget deficit will widen only slightly and will remain just under 2% of GDP in 2007-08, well below the 3% ceiling established by the euro area Stability and Growth Pact," the EIU said last month.

However, the publication went on to warn that: "Experience from the previous election suggests that public spending can go out of control very fast in Cyprus's small economy, therefore much will depend on the government's vigilance."

Under EU rules, Cyprus is due to increase the rate of value-added tax (VAT) on specific items, including medicines and restaurants, from January 2008. Depending on the item, rates will go up from 0% to 5%, 8% to 15%, or 0% to 15%. The government is trying to negotiate a delay to avoid perceptions that adoption of the euro will lead to a spike in prices.


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