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UNCLAS NICOSIA 000088 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV EUN CY
SUBJECT: CYPRUS' SUCCESSFUL TRANSITION TO EURO 
 
REF: (A) 07 NICOSIA 582, (B) 07 NICOSIA 498, (C) 07 NICOSIA 439, (D) 
07 NICOSIA 247, (E) 07 NICOSIA 144 
 
(U) This cable is sensitive but unclassified.  Please treat 
accordingly. 
 
¶1.  (SBU) SUMMARY.  By all accounts, Cyprus has managed the 
transition to the Euro quite successfully.  The smooth changeover is 
being used by the incumbent government in the current presidential 
election campaign as an example of its sound economic governance. 
The only problem, covered extensively in the press, has been 
instances of unjustifiable price increases.  Still, supported by an 
economy enjoying 4 percent growth, Cypriots seem increasingly 
positive about the Euro.  END SUMMARY. 
 
Cyprus Joins Eurozone 
--------------------- 
 
¶2.  (U) On January 1, 2008, Cyprus, along with Malta, joined the 
Eurozone, the group of 13 other EU countries using the Euro as their 
national currency.  The two new members have added a combined total 
of just 1.2 million people to the 320 million Europeans already 
using the Euro.  Despite their small size, the two countries have 
equal voting rights with the other Eurozone members at the European 
Central Bank.  Cyprus Central Bank Governor, Athansios Orphanides (a 
19-year veteran of the U.S. Federal Reserve Bank), told us that he 
greatly looks forward to full participation at the ECB Board 
meetings. 
 
¶3.  (U) Cypriots are proud of their achievement in joining the 
Eurozone less than four years after their accession to the EU (on 
May 1, 2004.)  For a small, open economy like Cyprus, the 
anticipated benefits include lower and more stable interest rates, 
greater fiscal discipline, reduced corporate expenses from currency 
conversion, increased potential to attract foreign investment, and 
an expanded horizon for Cypriot firms abroad.  The head of the 
Cyprus Stock Exchange told us that even with the current volatility 
at his bourse arising from international financial turbulence, the 
situation would probably be worse if the Euro were not there to act 
as a monetary anchor for both domestic and foreign investors 
 
¶4.  (SBU) On the other hand, there are also challenges for Cyprus. 
Central Bank Governor Orphanides said on January 18, "Being in the 
Euro area means that monetary policy in our country is identical to 
that of all other countries with the common currency.  Giving up 
monetary policy at the national level elevates the importance of 
sound fiscal policy to maintain economic stability.  It also places 
a premium on structural reforms, aiming to increase productivity and 
improve our international competitiveness and, hence, our standard 
of living.  For these reasons, it is imperative to follow prudent 
policies and advance the necessary conditions to reap the potential 
benefits of the Euro." Comment: The Governor was clearly taking aim 
at the populist (and high-cost) programs being proposed by 
candidates in the current presidential race. End Comment. 
 
British Bases Adopt Euro, North Makes Unofficial Transition 
---------------------- 
 
¶5.  (U) As reported by the British Broadcasting Corporation (BBC), 
the Euro also became legal tender on British military bases in 
Cyprus, the first part of sovereign British territory to adopt the 
currency.  Although the bases at Dhekelia, Episkopi and RAF Akrotiri 
are not officially part of the European Union, an estimated 10,000 
Cypriots live or work there.  Residents use the shops, cafes and 
beaches on the bases, so the authorities in the sovereign base areas 
decided to adopt the same rules as the Cypriot government. While the 
Turkish lira remains the official currency in the "TRNC," Euros are 
now very welcome and widely used in the north as well, just as 
Cyprus Pounds were before the transition. 
 
Transition Logistics 
-------------------- 
 
¶6.  (U) Even those in opposition to the government, including those 
who had opposed Euro accession at this time, agree that the 
transition itself has gone very smoothly.  In a written statement 
shortly after January 1, 2008, Economic and Monetary Affairs 
Commissioner Joaquin Almunia noted that "the adoption of the Euro 
was proceeding very quickly, reflecting good preparation."  ECB 
President Jean-Claude Trichet also stated on January 18, "Everything 
has gone smoothly.  However, nothing would have been feasible 
without the exceptional performance of the Cypriot economy, during 
the convergence process." 
 
¶7.  (U) Already by January 5 (well before the expiration of the 
parallel circulation of the Cyprus Pound alongside the Euro on 
January 31), 72 percent of cash payments and 80 percent of all 
transaction were being conducted in Euro, while change in Euro was 
given in 97 percent of transactions.  This success is ascribed both 
to Cypriots' familiarity with the Euro from travel to the Eurozone 
over the years and to the thorough preparations by the Central Bank 
and Ministry of Finance.  These organizations designed and 
implemented a program that widely publicized the changeover, 
provided every household with a currency conversion calculator, and 
- via careful coordination with commercial banks - ensured that ATM 
machines, tellers and bank systems were fully prepared for January 
¶1.  It all went off smoothly with the only hitch being long lines of 
people seeking to convert their Cyprus Pounds to Euros the first 
week in January even though the old currency remained acceptable for 
transactions through the month and convertible for the rest of the 
year. 
 
¶8.  (U) Two weeks after the introduction of the Euro, a research 
study conducted by the European University Cyprus from January 16 to 
24 revealed that perceptions domestically had changed in favor of 
the Euro: 55 percent of those interviewed responded that they 
expected the Euro to affect the Cypriot economy positively, up 
considerably from 32 percent several months earlier.  Another 57 
percent also said they expected the Euro to benefit them personally, 
compared to 29 percent several months earlier. 
 
¶9.  (U) The same study, though, revealed that 65 percent of 
interviewees said they experienced some form of rounding up of 
prices, although (perhaps incongruously), 96 percent of these paid 
the extra charges without complaining.  Most of the price increases 
occurred, according to the study, at supermarkets, followed by 
kiosks, bakeries, barbers and hairdressers, parking lots, and 
medical services. 
 
¶10.  (U) The massive operation of physically importing and 
distributing Euros 8 billion in cash and, at the same, withdrawing 
CP 6 billion was completed in one month (by the end of January) with 
no currency lost or stolen.  The Chief of Police was proud to accept 
credit for this achievement (since all cash deliveries were 
conducted under armed police escort), and noted that elsewhere in 
the Eurozone there had been incidents robberies, thefts or 
burglaries, during the transition to the Euro. 
 
Close Watch on Prices 
--------------------- 
 
¶11.  (U) The GOC made every effort to ensure that the transition 
would not result in unjustified price increases.  Months before the 
transition, the GOC had launched a voluntary "fair pricing" scheme, 
encouraging businesses to refrain from rounding up of prices.  The 
GOC has also helped set up regional "Euro-Observatories," located in 
each of the four main districts, to monitor the changeover process. 
Specifically, these observatories have been tasked with implementing 
legal aspects of the changeover, providing information to the 
public, and acting as intermediaries between the government and the 
public.  At the same time, they have been authorized to conduct 
investigations following infringements of the fair pricing scheme. 
While increasing prices was not illegal, the GOC used a "name and 
shame" approach to limit both the incidence and the magnitude of any 
increases.  Another tool, which has proved effective, has been the 
obligation of traders and service providers to display prices in 
both Euros and Cyprus pounds from September 1, 2007 to September 30, 
¶2008. 
 
¶12.  (U) Despite these measures, there have been many documented 
instances of price increases made under cover of currency 
conversion; an issue covered extensively by the media (print, in 
particular).  There are also indications that some local businesses 
may have rounded up their prices early (i.e., sometime in the second 
half of 2007) in anticipation of the transition although this seems 
to have been the case more with small shops while big supermarkets 
made much of their promise to round prices down.  Nevertheless, the 
end results may have contributed to the increase in Cyprus' 
Harmonized Index of Consumer Prices (HICP) to 3.7 percent by the end 
of December 2007, compared to the Eurozone's average of 3.1 percent. 
 
 
¶13.  (SBU) Comment.  Learning from other countries' changeover 
errors and planning early and thoroughly, Cyprus' Euro transition 
has been completed without any major problems.  With Presidential 
elections just around the corner (February 17 and 24), a smooth 
transition to the Euro was, clearly, a top priority for the 
incumbent government and President Papadopoulos is hoping that this 
success will serve as another feather in his regime's economic cap. 
Against a backdrop of strong growth, relatively low inflation and 
unemployment, diminishing public debt, and fiscal surpluses for the 
first time in three decades even in the face of global financial 
turbulence, it is easy for this government to claim successful 
stewardship of the economy, even if there are important structural 
challenges that have yet to be met. End Comment 
 
SCHLICHER