Cyprus, Malta Start Using the Euro (Bloomberg) (02-01-2008)

Jan. 2 (Bloomberg) -- Cyprus and Malta joined the 15 economies using the euro, also giving the two island nations a say in shaping European Central Bank policy.

Hundreds of people in the capital cities of Nicosia and Valletta celebrated with fireworks and music as the Cypriot pound and Maltese lira followed the French franc and German mark into the history books.

The Mediterranean islands reduced budget deficits and borrowing costs to prepare for the euro, attracting international investment and tourism that has spurred economic growth. Entry will also earn the countries seats on the ECB's governing council, which sets interest rates.

Being small open and thriving economies, both Cyprus and Malta will benefit from a stable and widely used currency, which will provide a major advantage, according to Holger Schmieding, chief European economist at Bank of America Corp. in London.

The European Commission said in a statement today that data from banks and shops indicated the changeover to the euro passed smoothly in both countries.

Cyprus and Malta are respectively the wealthiest and smallest of the 10 mostly eastern European nations that joined the European Union four years ago. They become the first to adopt the euro since Slovenia a year ago.

The currency today celebrates its ninth birthday, driving an economy with a gross domestic product of 8.8 trillion euros ($13 trillion), 2 trillion euros more than at its inception and 440 times the combined economies of Cyprus and Malta.

The euro has climbed in all but one of the past six years, reaching a record $1.4967 on Nov. 23. The currency accounts for 26.4 percent of global foreign-exchange reserves, up from about 18 percent in 1999, the International Monetary Fund said last week.

While Cyprus's 15 billion-euro and Malta's 5 billion-euro economies will barely lift the region's output, membership in the single currency has financial and political ramifications. The ECB's governing council grows to 21 from 19 with the arrival of Bank of Cyprus Governor Athanasios Orphanides and Maltese Central Bank Governor Michael Bonello.

Still, for nearly three-quarters of Cypriots and two-thirds of Maltese, the euro is fueling concerns that prices will raise a European Commission survey in November found. Those fears prompted the governments to strike ``fair price'' agreements with about 7,130 Cypriot companies and 6,500 Maltese enterprises to limit cost increases.

Greek Cypriots also hope the euro may ease the island's political rift. Cyprus was divided in 1974 when the Turkish army seized the northern half of the island after a coup backed by the military junta that ruled Greece. As a result, only the internationally recognized Greek-speaking Republic of Cyprus entered the EU and adopted the euro today.

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