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By Michael Grech – Chairman, Michael Grech Financial Investment Services Limited
As time goes by, more and more Maltese are asking, talking and thinking about what will happen when the Maltese Lira will change into Euro. There are still people out there who think that going for the Euro for us Maltese is an option. This is not the case. When we voted for joining the European Union, automatically we were also confirming that we would be changing our Lira to Euro in the future.
The two most frequent questions that people are asking right now are “When are we converting into Euro?” and “At what rate this conversion will be?” There is no definite answer to both questions. First of all in order for us to be able to qualify to convert into Euro, we have to go through what is called the European Rate Mechanism or ERM. Going into the ERM means that we have to go through a transitional period of time, probably two years, whereby the rate of exchange of the Maltese Lira to the Euro is fixed at a certain rate but with the possibility of having a fluctuation of plus or minus 15 per cent from that fixed rate.
During that transitional period the Maltese government has to satisfy certain conditions which are imposed by the European Union. One of the most important of these conditions is that the deficit is brought down to a percentage not higher than three per cent of GDP. This primary condition is one of the reasons that the government is trying all measures possible to raise more money by taxes whether by direct or indirect means and to cut costs as much as possible. The privitisation programme that the government has embarked on in the past and which is still taking place now (this year we probably have the disposal of the shareholding in Bank of Valletta, Maltacom and half of the remaining shareholding in Malta International) will probably help the government to reach the required criteria.
Going to the second question, recently the suggestion by the Labour Party for a devaluation of our Lira has brought the issue into the political arena. The government is saying that a devaluation will have in general a negative effect on the economy and that it is not prepared to go down this road. In truth one has to admit that you will never find a government that will ever confirm in advance that it wants to do a devaluation. This issue should not be subjected to a political tug-of-war. One also has to keep in mind that currently the percentage of Euro within the basket of currencies making up our Lira is already 70 per cent. Rather than speculating what the rate of the Euro to the Maltese Lira will be when we eventually qualify for adopting the new currency, I am of the opinion that the government has to take the necessary measures so that what has happened in other European countries when they converted to the Euro does not happen in Malta. Two years down the line many people in Italy and other European countries are still complaining that the cost of living for them has gone up since prices were “rounded up” and unscrupulous businessmen took an advantage of the situation to put up their prices.
The only certain thing that I see in this issue is that we still have to take more of the bitter medicine because as the governor of the Central Bank of Malta has correctly, repeatedly indicated: “We have been living beyond our means for a long time”.
This article should not be taken as a recommendation for an investment. Fluctuation in investments and the currencies they are denominated in can go up as well as down. Investors should seek professional advice before taking any investment decision. Michael Grech Financial Investment Services Limited is licencesed to conduct investment business by the Malta Financial Services Authority.
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