Euro adoption northern Cyprus

This week NTV Turkey said that preparations were under way in northern Cyprus for the adoption of the euro after a settlement of the Cyprus problem. Speculation that this was going to happen before a settlement turned out to be false.

This particular changeover to the euro will be unique in a number of ways.

For one, it will be the first time in eurozone that an already existing and internationally traded currency (the Turkish lira) will be swapped for another already existing and internationally traded currency (the euro).

In all other cases to date, one currency, such as the Deutschmark or Cyprus pound, ceased to exist when the new currency was introduced.

The positive impact of this is that it takes away some of the fears that were expressed in the run-up to the twin referenda on the Annan Plan in 2004.

Some were worried that a speculator with bad intent could use all those Turkish lira floating around Turkey’s €800 billion economy to speculate on the Cyprus pound, creating volatility for a united Cyprus.

No one ever quite explained quite how this could happen in practice, but that did not stop people worrying about it.

Today that fear has gone away, because the Turkish Cypriots will be adopting the currency of a €10 trillion currency area, where currency manipulation would require a lot of big investment banks behaving badly.

 

The euro is already in circulation

The second reason why it will be different is that northern Cyprus is already, in practice, a multi-currency area.

Real estate is priced in British pounds sterling, electronic items are priced in US dollars, a range of other goods are priced in euro but everyone gets paid in Turkish lira.

This is why you can pay for goods and services in northern Cyprus with euro and get change in euro.

One can assume therefore, that once the euro is adopted as the island-wide legal tender of a united island, the private sector, especially shops serving Turkish tourists, will carry on as before: taking payments in whatever currency the buyer wishes to pay.

Accepting payments in another currency is all perfectly legal. My own company has some clients who pay in sterling and some in US dollars. I would prefer to get paid in euro, not least because of the punitive bank charges, but I am not going to turn away a client on that basis.

 

Positive impact on prices

The most visible change for ordinary people is that their salaries and taxes will be in euro, instead of Turkish lira.

For Turkish Cypriots, this should be a good thing, as it will also mean stability in prices. One of the unusual features of the trading relationship between Turkey and northern Cyprus is that, despite both using the Turkish lira, exports are priced either in euros or dollars.

So when the Turkish lira weakens—it has fallen around 20% against the euro since the beginning of the year—people’s salaries stay the same but the prices of food, clothing and electronic items and so on go up.

This is why inflation in northern Cyprus tends to run much higher than in the rest of the island. In September the year-on-year inflation rate in the north was 6.4%, compared with deflation (falling prices) of 2.5% in the south.

 

A big impact on the banks

One of the biggest impacts will be felt in the planning departments of the banks. They will have to implement all of the thousands of pages of laws on supervision, oversight, capital requirements, reserve requirements, anti money-laundering and so on.

Those dealing with public finances will have to do the same. Membership of the euro area comes with very strict rules these days in the form of the Growth and Stability Pact, which insists on proper budget planning, budget deficit limits and so on.

This is why it is important to bring in technical assistance to start now, even before a deal is signed. The sooner that work begins, the faster the two economies can integrate and the more robust a united island economy will be.

The author is Director of Sapienta Economics www. sapientaeconomics.com