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 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.

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 are to 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, is to be adapted as necessary with a view to ensuring compatibility with Articles 108 and 109 of the Treaty and the Statute of the European System of Central Banks and of the European Central Bank (hereinafter referred to as ‘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 2 of the Protocol on the convergence criteria, the criterion on the government budgetary position referred to in the second indent of Article 121(1) of the Treaty means 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.

According to Article 3 of the Protocol on the convergence criteria, 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 has provided the framework for assessing the fulfilment of the exchange rate criterion. In assessing the fulfilment of this criterion in their reports, the Commission and the ECB have examined the two-year period ending 26 April 2007.

According to Article 4 of the Protocol on the convergence criteria, 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 fulfilment 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 %.

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.

Consequently, Cyprus fulfils the necessary conditions for the adoption of the single currency.

According to Article 122(2) of the Treaty the Council, acting by qualified majority on a proposal from the Commission, is to 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,