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Last Updated: Monday, 31 December 2007, 06:08 GMT
Cyprus price fears get euro boost
By Dominic Laurie
European business reporter, BBC News, Nicosia

Boy walking past a banner promoting the euro in Cyprus
Cyprus has been promoting the euro's introduction on 1 January

If you spend any amount of time in the Republic of Cyprus, two topics always seem to come up in conversation.

One is the 33-year-old Turkish occupation of much of the north of the island, and the pain that still causes the Greek Cypriot community.

The second is the cost of living.

A common refrain is that wages just don't cover the price of goods in the shops - many of which have to be imported.

So when the government announced a few years ago that it was going to join the euro from 1 January, 2008, many people were worried.

They are a well-travelled lot here, and they knew that people in other countries had complained of price rises when the euro came.

And that played to the Cypriots' worst fears about what would happen on their island.

Several opinion polls in early to mid-2007 showed most Cypriots feared price rises.

So the government knew it would have to do a very good job of persuading people that the euro would not be responsible for higher costs.

It needed to learn from the mistakes made in other euro-adopting countries.

All inclusive

The government realised one way it could do this would be to hammer home into its citizens' heads the exact conversion rate from the euro to the Cypriot pound.

That way, after 1 January people would know if they were being duped into paying more.

Woman selling goods at a stall
The changes will impact both big and small companies and traders

Hence the action plans.

For the last six months, every retail outlet has had to display prices in both euros and Cypriot pounds.

At even the simplest market stall and kebab shop, the card or label will have two figures on it.

Most shops have also had to display a poster on the wall, showing a whole long list of conversion values between the two currencies.

More recently, major public buildings in the capital Nicosia were then draped with huge tarpaulins showing pictures of the new coins and notes.

In October, the government announced it was going to employ 100 inspectors to monitor the price of goods both before and after the introduction of the new currency.

The country's consumer association did something similar - and also got retailers to sign up to a fair pricing agreement for when the euro would come in.

From mid-December, every home in the republic was posted a calculator, that automatically converts a euro price into a Cyprus pound price.

Shock free

The government seems to have got its message across.

I took a stroll down Ledra Street, the main shopping thoroughfare in Nicosia. And most people I spoke to thought retailers would find it difficult now to get away with sneaking in price rises.

What a Cyprus euro will look like
The new Cyprus euro coin will show a 3,000 BC cruciform idol

They pointed to the huge publicity surrounding the introduction of the new currency, and the bright spotlight shone on the retailers' behaviour.

Pretty much everyone, they said, now knows the conversion rate off by heart - 1.71 euros to the Cyprus pound.

Even the president of the Cyprus' Consumer Association, Petros Markou, says he is pretty untroubled.

"I think people have overcome their fears," he explains. "The economy has healthy competition now, so that monopolies and oligopolies find it hard to prevail.

"Our economy follows the rules of the free market, of supply and demand. Secondly, Cypriots are well-travelled. They go to Greece, and further afield, and are already familiar with using the euro. It won't come as too much of a shock to them."

That is not to say that Cypriots are not worried about price rises in general. Far from it.

It is just they are linked to something different - inflation.

Price moves

In a pretty unfortunate piece of timing for the authorities, earlier in December they had to announce that year-on-year consumer price inflation rose to 3.5% in November from 3% in October.

Our fellow citizens also have to exercise some self-control to keep wage demands within the realms of productivity
Michalis Sarris,
Cyprus' Finance Minister

Some individual prices have risen by far more, with healthcare costs climbing by 6.9%, transport by 6.6%, and hotels and restaurants by 6.1%.

The upwards pressure on prices has meant that, at its last very meeting in December, the Cypriot Central Bank kept its main interest rate on hold at 4.5%.

Analysts said that with the introduction of the euro it would have dearly liked to bring the borrowing costs more into line with the European Central Bank (ECB) rate of 4%, but that was not possible.

Cypriots are obviously keen at the moment to spend their money, and it does have some benefits. The economy is growing almost twice as fast as the European average.

But the flip side of higher-than-ideal inflation is hurting business.

Alternative efficiencies

Take Zorbas Fine Foods, one of the biggest private employers on the island, that runs 50 or so shops selling anything from cakes and biscuits to ready meals.

It is expanding into wholesale too, having just won the contract to provide the local McDonald's with their buns and Cyprus Airways with bread rolls.

Cypriot food company
Companies have mixed feelings about the introduction of the euro

However, chief financial officer Michael Michael says the costs of doing business is rising very fast.

"Almost all of our products are made of flour," he explains. "The wheat price has gone up 100% in the last year. So that has hit us a lot."

At the same time he says the company is wrestling with higher energy, labour and transport costs that are squeezing margins.

"The minimum wage has risen on average 6% to 8% each year for the last five years," he says. "We try not to pass the increases on to our customers, since our customers are king. We try to find alternative ways to get efficiencies."

Cyprus is, of course, an island, and is relatively detached from the rest of the EU.

It is nearer Lebanon than it is to any other EU state. So it has to import the vast majority of what it consumes.

At a time when the price many of those goods is rising fast, this affects them more than other more self-sufficient countries.

'Self-control'

However, Cyprus' Finance Minister Michalis Sarris says a bit of self-discipline will get them through the situation.

Euro note
The euro has become a powerhouse of an international currency

"Coinciding with, but totally unrelated to the euro, we have strong inflationary pressures," he explains.

"So we have to be extra careful that our budgetary policy has to be restrictive. And we are very fortunate that we are already seeing budget surpluses.

"Our fellow citizens also have to exercise some self-control to keep wage demands within the realms of productivity."

The central banker's favourite tool to rein in inflation - putting up domestic interest rates - is about to be taken away from Cyprus.

Within the eurozone, it is the ECB that controls borrowing costs for all of countries that use the single European currency.

But the government message is that if wages are realistic and public spending not overly generous, then the island will be able to cope.

The euro is coming at a time when the Cyprus economy is growing fast, and its people are spend, spend, spending.

The Cypriot authorities will hope that does not all come to a sorry end.

If it does, then the euro, perhaps unfairly, could get a lot of the blame.

SEE ALSO
Cyprus and Malta to adopt euros
10 Jul 07 |  Business
Cyprus and Malta get euro boost
16 May 07 |  Business
Cyprus applies to join the euro
13 Feb 07 |  Business
Country profile: Cyprus
14 Mar 07 |  Country profiles
Country profile: Malta
14 Mar 07 |  Country profiles

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