Proposal for a Council Decision in accordance with Article 122(2) of the Treaty on the adoption by Cyprus of the single currency on 1 January 2008
Date: 2007-05-16
Institutions: European Commission
Subjects: Cyprus, Economic and Monetary Union, European Monetary System, convergence criteria, economic convergence, euro

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 16.5.2007 
COM(2007) 256 final 

2007/0090 (CNS) 

Proposal for a 

COUNCIL DECISION 

in accordance with Article 122(2) of the Treaty 
on the adoption by Cyprus of the single currency on 1 January 2008 

(presented by the Commission) 

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EXPLANATORY MEMORANDUM 

On  3  May  1998  the  Council  decided  that  Belgium,  Germany,  Spain,  France,  Ireland,  Italy, 
Luxembourg,  the  Netherlands,  Portugal,  Austria  and  Finland  fulfilled  the  necessary 
conditions for the adoption of the single currency on 1 January 1999. Denmark and the United 
Kingdom made use of their opt-out clauses and were not, therefore, assessed by the Council. 
Greece and Sweden were considered by the Council as Member States with a derogation. On 
19 June 2000, the Council decided that Greece fulfilled the necessary conditions to adopt the 
euro on 1 January 2001. The countries which joined the European Union on 1 May 2004 (the 
Czech  Republic,  Estonia,  Cyprus,  Latvia,  Lithuania,  Hungary,  Malta,  Poland,  Slovenia  and 
Slovakia)  became  Member  States  with  a  derogation  in  accordance  with  Article  4  of  the 
respective Act of Accession. On 11 July 2006, the Council decided that Slovenia fulfilled the 
necessary conditions to adopt the euro on 1 January 2007. Bulgaria and Romania, who joined 
the  European  Union  on  1  January  2007,  became  Member  States  with  a  derogation  in 
accordance with Article 5 of the respective Act of Accession. 

Article 122(2) lays down the procedures for the abrogation of derogations. These procedures 
are  to  be  initiated  at  least  once  every  two  years  or  at  the  request  of  a  Member  State  with  a 
derogation.  According  to  these  procedures  the  Commission  and  the  European  Central  Bank 
have to report to the Council in accordance with Article 121(1) on the progress made in the 
fulfilment by Member States with a derogation of their obligations regarding the achievement 
of  economic  and  monetary  union.  Based  on  its  own  report  and  that  of  the  ECB,  the 
Commission  can  submit  to  the  Council  a  proposal  for  a  Council  decision  to  abrogate  the 
derogation of the Member States fulfilling the necessary conditions. 

All countries with a derogation were assessed by the Commission and the ECB in 2006. On 
13 February 2007, Cyprus submitted a request for a new convergence assessment with a view 
to  introduce  the  euro  on  1 January 2008  in  case  the  derogation  were  to  be  abrogated.  As  a 
response  to  this  request,  the  Commission  and  the  ECB  prepared  Convergence  Reports  for 
Cyprus.  

The  Commission  Convergence  Report  2007  on  Cyprus  was  adopted  by  the  College  on  16 
May  2007.  The  ECB  has  adopted  its  report  on  the  same  day.  The  reports  include  an 
examination of the compatibility between Cyprus's national legislation, including the statutes 
of  its  national  central  bank,  and  Articles  108  and  109  of  the  Treaty  and  the  Statute  of  the 
ESCB and the ECB. The reports also examine the achievement of a high degree of sustainable 
convergence  by  reference  to  the  fulfilment  of  the  convergence  criteria  and  take  account  of 
several other factors mentioned in the final sub-paragraph of Article 121(1). 

In  its  convergence  report,  the  Commission  concludes  that  a  high  degree  of  sustainable 
convergence has been achieved in Cyprus. 

On  the  basis  of  its  report  and  that  of  the  ECB,  the  Commission  has  adopted  the  attached 
proposal  for  a  Council  decision  to  abrogate  the  derogation  of  Cyprus  with  effect  from 
1 January 2008. 

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2007/0090 (CNS) 

Proposal for a 

COUNCIL DECISION 

in accordance with Article 122(2) of the Treaty 
on the adoption by Cyprus of the single currency on 1 January 2008 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  establishing  the  European  Community,  and  in  particular 
Article 122, paragraph 2, thereof, 

Having regard to the proposal from the Commission, 

Having regard to the report from the Commission1, 

Having regard to the report from the European Central Bank2, 

Having regard to the opinion of the European Parliament, 

Having regard to the discussion of the Council, meeting in the composition of Heads of State 
or Government, 

Whereas: 

(1) 

(2) 

(3) 

1 
2 
3 
4 
5 

The  third  stage  of  economic  and  monetary  union  (EMU)  started  on  1  January  1999. 
The Council, meeting in Brussels on 3 May 1998 in the composition of Heads of State 
or  Government,  decided  that  Belgium,  Germany,  Spain,  France,  Ireland,  Italy, 
Luxembourg,  the  Netherlands,  Austria,  Portugal  and  Finland  fulfilled  the  necessary 
conditions for adopting the single currency in 1 January 19993. 

The  Council  decided  on  19  June  2000  that  Greece  fulfilled  the  necessary  conditions 
for adopting the single currency on 1 January 20014. The Council decided on 11 July 
2006 that Slovenia fulfilled the necessary conditions for adopting the single currency 
on 1 January 20075. 

In  accordance  with  paragraph  1  of  the  Protocol  on  certain  provisions  relating  to  the 
United  Kingdom  of  Great  Britain  and  Northern  Ireland  annexed  to  the  Treaty,  the 
United Kingdom notified the Council that it did not intend to move to the third stage 
of  EMU  on  1  January  1999.  This  notification  has  not  been  changed.  In  accordance 

Report adopted on 16 May 2007 - COM(2007) 255). 
Report adopted on 16 May 2007.  
Council Decision 1998/317/EC of 3 May 1998 (OJ L 139, 11.5.1998, p. 30). 
Council Decision 2000/427/EC of 19 June 2000 (OJ L 167, 7.7.2000, p. 19). 
Council Decision 2006/495/EC of 11 July 2006 (OJ L 195, 15.7.2006, p. 25). 

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(4) 

(5) 

(6) 

(7) 

(8) 

with paragraph 1 of the Protocol on certain provisions relating to Denmark annexed to 
the Treaty and the Decision taken by the Heads of State or Government in Edinburgh 
in December 1992, Denmark has notified the Council that it will not participate in the 
third  stage  of  EMU.  Denmark  has  not  requested  that  the  procedure  referred  to  in 
Article 122(2) of the Treaty be initiated. 

By virtue of Decision 1998/317/EC Sweden has a derogation as defined in Article 122 
of  the  Treaty.  In  accordance  with  Article  4  of  the  Act  of  Accession6,  the  Czech 
Republic,  Estonia,  Cyprus,  Latvia,  Lithuania,  Hungary,  Malta,  Poland  and  Slovakia 
have a derogation as defined in Article 122 of the Treaty. In accordance with Article 5 
of  the  respective  Act  of  Accession7,  Bulgaria  and  Romania  have  a  derogation  as 
defined in Article 122 of the Treaty. 

The  European  Central  Bank  (ECB)  was  established  on  1  July  1998.  The  European 
Monetary System has been replaced by an exchange rate mechanism, the setting-up of 
which was agreed by a resolution of the European Council on the establishment of an 
exchange-rate  mechanism  in  the  third  stage  of  economic  and  monetary  union  of  16 
June  19978.  The  procedures  for  an  exchange-rate  mechanism  in  stage  three  of 
economic  and  monetary  union  (ERM  II)  were  laid  down  in  the  Agreement  of 
1 September  1998  between  the  ECB  and  the  national  central  banks  of  the  Member 
States outside the euro area laying down the operating procedures for an exchange rate 
mechanism in stage three of economic and monetary union9. 

Article 122(2) of the Treaty lays down the procedures for abrogation of the derogation 
of  the  Member  States  concerned.  According  to  that  Article  at  least  once  every  two 
years, or at the request of a Member State with a derogation, the Commission and the 
ECB shall report to the Council in accordance with the procedure laid down in Article 
121(1) of the Treaty. On 13 February 2007, Cyprus submitted a formal request for a 
convergence assessment.  

National  legislation  in  the  Member  States  including  the  statutes  of  national  central 
banks  shall  as  necessary  be  adapted  with  a  view  to  ensuring  compatibility  with 
Articles  108  and  109  of  the  Treaty  and  the  Statute  of  the  ESCB.  The  reports  of  the 
Commission  and  the  ECB  provide  a  detailed  assessment  of  the  compatibility  of  the 
legislation  of  Cyprus  with  Articles  108  and  109  of  the  Treaty  and  the  Statute  of  the 
ESCB.  

According to Article 1 of the Protocol on the convergence criteria referred to in Article 
121  of  the  Treaty  establishing  the  European  Community,  the  criterion  on  price 
stability  referred  to  in  the  first  indent  of  Article  121(1)  of  the  Treaty  means  that  a 
Member  State  has  a  price  performance  that  is  sustainable  and  an  average  rate  of 
inflation,  observed  over  a  period  of  one  year  before  the  examination,  that  does  not 
exceed by more than one and a half percentage points that of, at most, the three best 
performing Member States in terms of price stability. For the purpose of the criterion 
on price stability, inflation will be measured by the harmonised indices of consumer 

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9 

OJ L 236, 23.9.2003, p. 33. 
OJ L 157, 21.6.2005, p. 203. 
OJ C 236, 2.8.1997, p. 5. 
OJ  C  345,  13.11.1998,  p.  6,  as  amended  by  the  Agreement  of  14  September  2000  (OJ  C  362, 
16.12.2000, p. 11). 

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prices  (HICPs)  defined  in  Council  Regulation  (EC)  No  2494/9510.  In  order  to  assess 
the  price  stability  criterion  a  Member  State's  inflation  has  been  measured  by  the 
percentage  change  in  the  arithmetic  average  of  12  monthly  indices  relative  to  the 
arithmetic average of 12 monthly indices of the previous period. In the one-year period 
ending  in  March  2007,  the  three  best-performing  Member  States  in  terms  of  price 
stability were Finland, Poland and Sweden, with inflation rates of, respectively 1.3 %, 
1.5 % and 1.6 %. A reference value calculated as the simple arithmetic average of the 
inflation  rates  of  the  three  best-performing  Member  States  in  terms  of  price  stability 
plus  1.5 percentage  points  was  considered  in  the  reports  of  the  Commission  and  the 
ECB. On this basis, the reference value in the one-year period ending in March 2007 
was 3.0 %. 

(9) 

According to Article 2 of the Protocol on the convergence criteria referred to in Article 
121  of  the  Treaty  establishing  the  European  Community,  the  criterion  on  the 
government budgetary position referred to in the second indent of Article 121(1) of the 
Treaty  shall  mean  that  at  the  time  of  the  examination  the  Member  State  is  not  the 
subject  of  a  Council  decision  under  Article  104(6)  of  the  Treaty  that  an  excessive 
deficit exists. 

(10)  According to Article 3 of the Protocol on the convergence criteria referred to in Article 
121 of the Treaty establishing the European Community, the criterion on participation 
in the exchange-rate mechanism of the European Monetary System referred to in the 
third indent of Article 121(1) of the Treaty means that a Member State has respected 
the normal fluctuation margins provided for by the exchange-rate mechanism (ERM) 
of  the  European  Monetary  System  without  severe  tensions  for  at  least  the  last  two 
years before the examination. In particular, the Member State must not have devalued 
its  currency's  bilateral  central  rate  against  any  other  Member  State's  currency  on  its 
own  initiative  for  the  same  period.  Since  1  January  1999  the  ERM  II  provides  the 
framework for assessing the fulfillment of the exchange rate criterion. In assessing the 
fulfillment  of  this  criterion  in  their  reports,  the  Commission  and  the  ECB  have 
examined the two-year period ending in 26 April 2007. 

(11)  According to Article 4 of the Protocol on the convergence criteria referred to in Article 
121  of  the  Treaty  establishing  the  European  Community,  the  criterion  on  the 
convergence of interest rates referred to in the fourth indent of Article 121(1) of the 
Treaty  means  that,  observed  over  a  period  of  one  year  before  the  examination,  a 
Member State has had an average nominal long-term interest rate that does not exceed 
by more than two percentage points that of, at most, the three best performing Member 
States in terms of price stability. For the purpose of the criteria on the convergence of 
interest rates, comparable interest rates on 10-year benchmark government bonds were 
used. In order to assess the fulfillment of the interest-rate criterion a reference value 
calculated as the simple arithmetic average of the nominal long-term interest rates of 
the  three  best  performing  Member  States  in  terms  of  price  stability  plus  two 
percentage points was considered in the reports of the Commission and the ECB. On 
this basis, the reference value in the one year period ending in March 2007 was 6.4 %. 

10 

Council Regulation (EC) No 2494/95 of 23 October 1995 concerning harmonised indices of consumer 
prices  (OJ  L  257,  27.10.1995,  p.  1)  as  amended  by  Regulation  (EC)  No  1882/2003  of  the  European 
Parliament and the Council (OJ L 284, 31.10.2003, p. 1). 

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(12) 

In accordance with Article 5 of the Protocol on the convergence criteria referred to in 
Article 121 of the Treaty establishing the European Community, the data used in the 
current  assessment  of  the  fulfillment  of  the  convergence  criteria  will  be  provided  by 
the Commission. For the preparation of this proposal the Commission provided data. 
Budgetary  data  were  provided  by  the  Commission  after  reporting  by  the  Member 
States by 1 April 2007 in accordance with Council Regulation (EC) No 3605/93 of 22 
November 1993 on the application of the Protocol on the excessive deficit procedure 
annexed to the Treaty establishing the European Community11. 

(13)  On  the  basis  of  reports  presented  by  the  Commission  and  the  ECB  on  the  progress 
made  in  the  fulfilment  by  Cyprus  of  its  obligations  regarding  the  achievement  of 
economic and monetary union, the Commission concludes that: 

In Cyprus, national legislation, including the Statute of the national central bank, is 
compatible with Articles 108 and 109 of the Treaty and the Statute of the ESCB. 

Regarding the fulfilment by Cyprus of the convergence criteria mentioned in the four 
indents of Article 121(1) of the Treaty: 

– 

– 

– 

– 

the  average  inflation  rate  in  Cyprus  in  the  year  ending  March 2007  stood  at 
2.0 %,  which  is  below  the  reference  value  and  is  likely  to  remain  below  the 
reference value in the months ahead; 

Cyprus  is  not  the  subject  of  a  Council  Decision  on  the  existence  of  an 
excessive government deficit; 

Cyprus  has  been  a  member  of  ERM  II  since  2  May  2005;  in  the  two-year 
period ending 26 April 2007, the Cypriot pound (CYP) has not been subject to 
severe  tensions  and  Cyprus  has  not  devalued,  on  its  own  initiative,  the  CYP 
bilateral central rate against the euro; 

in  the  year  ending  March 2007,  the  long-term  interest  rate  in  Cyprus  was,  on 
average, 4.2 % which is below the reference value. 

Cyprus has achieved a high degree of sustainable convergence by reference to these 
criteria, and fulfils the necessary conditions for the adoption of the euro. 

(14)  The  Council,  acting  by  qualified  majority  on  a  proposal  by  the  Commission,  shall 
decide which Member States with a derogation fulfil the necessary conditions for the 
adoption  of  the  single  currency  and  abrogate  the  derogations  of  the  Member  States 
concerned. 

11 

OJ L 332, 31.12.1993, p. 7. Regulation as last amended by Council Regulation (EC) No 2103/2005 (OJ 
L 337, 22.12.2005, p. 1). 

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HAS ADOPTED THIS DECISION:  

Article 1 

Cyprus fulfils the necessary conditions for the adoption of the single currency. The derogation 
in favour of Cyprus referred to in Article 4 of the Act of Accession is abrogated with effect 
from 1 January 2008. 

This Decision is addressed to the Member States. 

Article 2 

Article 3 

This Decision shall be published in the Official Journal of the European Union. 

Done at  

For the Council 
The President 

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