CUPRINS - Universitatea George Bacovia

EU-Accession Of Cyprus: Implications And Challenges For EnterprisesMonetary and exchange rate policies in the last 3-4 years continue to aimat supporting low inflation and sustainable growth, an objective consistent withpromoting the real and nominal convergence of the economy of Cyprus. TheCyprus Pound (CYP) is pegged to the Euro, with a central parity of 1CYP=1,7086Euro and fluctuation margins of ±15,0% around this rate 11 though the actualfluctuations in recent years have continued to be very small, largely not exceedingthe narrow margins of ±15,0%. Owing to this pegging, the CYP has appreciated inline with the Euro against the US dollar since 2001. Overall, since 1999, the CYPrecorded a modest appreciation in real effective terms (IMF estimates).3. THE GENERAL EU ACCESSION FRAMEWORK3.1 The Copenhagen CriteriaThe conditions and criteria that the European Union applies to judgeapplications for accession are succinctly noted in the conclusions of theCopenhagen European Council meeting. These criteria—known as the Copenhagencriteria—are the following:• the stability of institutions guaranteeing democracy, the rule of law, humanrights and respect for and protection of minorities• the existence of a functioning market economy• the capacity to cope with competitive pressures and market forces withinthe Union• the ability to take on the obligations of membership, including adherenceto the aims of political, economic and monetary union.In addition, the Council underlined that accession would depend on thecapacity of theEU to take on new members, and reiterated that the momentum ofEuropean integration needed to be maintained. Uncertainties about the speed ofreform and socioeconomic adjustment of candidate countries as they prepare foraccession are taken into consideration by the EU. Thus, candidate countries need to11 The Cyprus pound was pegged to the Euro on 1 January 1999, while since 1 January2001, the fluctuation bands of ±15,0% around the central rate of 1,7086 Euro per CYP wereintroduced. In order to help anchor prices and expectations, The Central Bank followed apolicy of maintaining the parity of the Cyprus pound within a narrower “softer” band of±2,25%. As of 1 January 2001 the Central Bank has abolished all restrictions on mediumtermand long-term foreign currency borrowing by residents. This led to significant increasein capital inflows, as residents increased their borrowing in foreign currency, mostly Euro,taking advantage of the interest rate differential between Euro-denominated and pound–denominated loans. This prompted the Central Bank to abandon its operational policy ofmaintaining the parity of the Cyprus pound within the “softer” narrow bands of ±2,25%,effective August 13, 2001, so that currently the ±15,0% margins are in place, in line withERM II.195