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Can Cyprus Cope Inside the EMU?

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  • Panikos Constantinou

    ()
    (Ministry of Finance, Republic of Cyprus)

  • Andreas Charalambous

    (Ministry of Finance, Republic of Cyprus)

  • Les Manison

    (Ministry of Finance, Republic of Cyprus)

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    Abstract

    The purpose of this paper is to investigate whether Cyprus was ready to join the euro area and whether it can cope with the challenges inside the Economic and Monetary Union (EMU), given the loss of monetary policy autonomy. We examine the performance of the economy of Cyprus towards the road to the EMU, in terms of satisfying the Optimum Currency Area (OCA) criteria and achieving nominal and real convergence. We find that Cyprus satisfied the OCA criteria to a satisfactory degree and achieved full nominal convergence and relatively high real convergence. However, Cyprus needs to preserve fiscal consolidation given the recent inflation pressures and accelerate structural reforms with emphasis on the labour market, thus enhancing productivity and flexibility and offsetting possible adverse effects on competitiveness resulting from the real effective appreciation of the euro. Reforming the social security system is also imperative in order to improve the long-term sustainability of public finances.

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    File URL: http://www.ucy.ac.cy/erc/documents/Full%20text_Constantinou.pdf
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    Bibliographic Info

    Article provided by University of Cyprus, Economics Research Centre in its journal Cyprus Economic Policy Review.

    Volume (Year): 2 (2008)
    Issue (Month): 1 (June)
    Pages: 63-79

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    Handle: RePEc:erc:cypepr:v:2:y:2008:i:1:p:63-79

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    Related research

    Keywords: Optimum Currency Area; EMU; Real Convergence; Nominal Convergence;

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    1. Frankel, Jeffrey A & Rose, Andrew K, 1996. "The Endogeneity of the Optimum Currency Area Criteria," CEPR Discussion Papers 1473, C.E.P.R. Discussion Papers.
    2. Paul de Grauwe & Francesco Paolo Mongelli, 2005. "Endogeneities of Optimum Currency Areas: What brings Countries Sharing a Single Currency Closer together?," Working Papers de Economia (Economics Working Papers) 29, Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro.
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