In May 2004, the European Union welcomed ten new member states into its fold. Now, almost three years later, four of these states (Cyprus, Estonia, Latvia & Malta) are getting ready to adopt the Euro as their currency from January 1st 2008. But what effect will this have, not only on the local economies, but also the increasing number of expatriates owning properties or living in these countries?
Please note that Slovenia has already joined the Eurozone on January 1st 2007, whereas preparations in the remaining new member states are in various states of advancement.
Taking Cyprus as an example, we take a short look at how the adoption of the Euro as the Republic‘s national currency is likely to affect the country as a whole.
Aside from taking the main leap of becoming a fully fledged member of the European Union on May 1st 2004, Cyprus took its first step on the road to the Euro by joining the ERM II (Exchange Rate Mechanism 2) in May 2005. Since this time, the nation‘s economy has been geared towards meeting the economic criteria for joining the Eurozone, a goal initially set for January 1st 2007, but later adjusted and finalised for January 1st 2008.
Although the Cyprus Pound currently fluctuates against the Euro, exchange rates are due to be ‘locked‘ in August of 2007 in final preparation for the adoption of the new currency. Barring an ‘overlap period‘ of one month, the Euro will then become the only legal tender in Cyprus, with banks being obliged to exchange coins at par until 2009 and notes until the year 2017. The balances of any bank accounts held in the Republic will be automatically converted on January 1st 2007. No cheques written in Cyprus Pounds may be used after this date.
What about prices of goods and services?
One thing which residents of Cyprus, and indeed any other country joining the Eurozone, need to be aware of is specific price inflation, also known as ‘rounding up‘, a phenomenon seen in other countries joining the currency. Another, rather more specific to the Republic of Cyprus, is the anticipated devaluation of its currency in the run-up to the Euro’s adoption. Although devaluation was dismissed out of hand in a statement by the Central Bank‘s Governor on February 13th 2007, there are continuing concerns about the Cyprus Pound‘s stability during coming months. Should this become an issue, overseas foreign property owners in the Republic will see something of a drop in local real estate values compared to their ‘home currenciesv prior to the sharp rises predicted during 2008.
It should be noted that it will still be possible to hold Cypriot bank accounts in Pounds Sterling after the Euro’s adoption in January 2008, although these will of course continue to fluctuate against the local currency as before.
How will interest rates be affected?
The fact that Cypriot interest rates are substantially lower than their UK equivalents has long acted as an attraction for British homebuyers in the Republic. This trend is likely to continue unabated, since Euro interest rates are even lower than current Cypriot rates.
What about other effects?
The move into the Euro’s fold will of course offer a greater amount of stability to local economies, since the risk of exchange rate fluctuations will effectively be eliminated compared to the rest of the European Economic Community and greatly reduced when compared to the rest of the world. Furthermore, it will of course be far easier to gauge relative prices in comparison to other member states in the Eurozone. It is generally anticipated that the Euro’s adoption will result in greater European investment, not only in Cyprus, but other member states also.
But, as they say: ‘The show’s not over until the fat lady sings’. Although the countdown to the Euro’s adoption is ticking away to itself, there are of course still a number of final hurdles to be overcome which may well result in a subtle variation between current projections and the finished article in each country. We shall have to wait until January 1st 2008 to see.
One thing seems certain however; 2007 should prove an outstanding year for foreign investments, not only in Cyprus, but Estonia, Latvia & Malta too.