Jan. 1 (Bloomberg) -- Cyprus and Malta became the latest economies to embrace the euro, increasing membership of the common currency to 15 and 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.

``We're sorry to say goodbye to the pound but it's with joy that we welcome the euro,'' Cypriot President Tassos Papadopoulos said in a ceremony at the country's Economy Ministry. ``Happy new year with a happy new currency,'' he said, as he cut the traditional New Year's Pie, containing a euro coin for good luck.

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.

``Both Cyprus and Malta are small, open and thriving economies for whom having a stable and widely used currency will provide a major advantage,'' said Holger Schmieding, chief European economist at Bank of America Corp. in London.

Maltese Prime Minister Lawrence Gonzi failed in his first attempt to get euros from an automatic teller machine at a celebration in Valletta, according to images shown on ``One TV.'' Aides took him to a second ATM, where he withdrew 20 euros.

Global Reserves

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.

New Members

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.

ECB President Jean-Claude Trichet acknowledged a month ago that some members wanted higher rates as inflation continues to top the target of just below 2 percent. Christoph Weil, an economist at Commerzbank AG in Frankfurt, says the membership expansion makes it even ``harder to agree on a common position.''

Orphanides, 45, who served as an adviser in the Federal Reserve's monetary affairs division, wrote in a 2003 paper that central banks that raise interest rates too soon can derail economic growth. Bonello, 62, has run the Maltese bank since 1999 after working as an economist at the United Nations Conference on Trade and Development in Geneva.

``The central bankers are both very respected and will allow their countries to punch above their weight,'' said Schmieding.

Stronger Economies

Cyprus and Malta each strengthened their economies to prepare for the euro and both cut interest rates last month to bring their benchmarks in line with the 4 percent of the ECB. Growth in Cyprus averaged more than 3.5 percent a year for more than a decade, inflation slowed from 4 percent in 2003 and the government's now running a budget surplus after a deficit of 6.2 percent of GDP in 2003.

Malta's economy has grown every year since 2003 and had the EU's lowest inflation rate in 2007. The EU in 2007 removed Malta from surveillance it had been under for its budget deficit.

Apart from attracting investment, the euro may also make more cash available for domestic spending. Bank of Cyprus Pcl, the country's biggest lender, expects to cut foreign reserves, releasing as much as 5 billion euros to finance lending.

Still, for nearly three-quarters of Cypriots and two-thirds of Maltese, the euro is fueling concerns that prices will rise, 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.

Political Rift

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.

The ``Green Line'' separating Greek and Turkish Cypriots also marks an economic divide. The south's per-capita income of 18,900 euros ($27,850) is more than triple that of the Turkish north.

``Joining the euro is one more incentive for Turkish Cypriots to help solve the problem,'' Cypriot Foreign Minister Erato Kozakou-Marcoullis said in an interview. ``The closer and deeper we get into Europe, the more it helps toward reunification.''

Greek Cypriots rejected the latest attempt at unification, defeating a proposal that had the backing of the Turkish side in 2004.

New Coins, Notes

In adopting the euro, Cyprus required 395 million new coins and 60 million banknotes worth about 1.3 billion euros, compared with Malta's 140 million coins and 41.5 million banknotes, valued at about 840 million euros.

To replace the Cypriot pound, the currency since the former British colony gained independence in 1960, Cyprus chose the image of a prehistoric idol from 3000 B.C. Malta's coins depict symbols including the eight-point Maltese cross, coats of arms and the Mnajdra Temple, which may be the world's oldest free- standing buildings.

To contact the reporters on this story: Simon Kennedy in Paris at skennedy4@bloomberg.netHarry Papachristou in Athens at hpapachristo@bloomberg.net.

Last Updated: January 1, 2008 08:20 EST