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Love it or hate the decision to adopt the Euro on the 1 January 2008 has been mired in controversy. The opposition agrees to the introduction of the Euro but claims that the economy is not ready.
The Prime Minister rebuts that the economy is on the mend and the ERMII conditions will be met by the stipulated date with minimum hindrance to stakeholders. The public contend that any move to reduce the burgeoning bank charges on currency conversions and a cut in interest rates on mortgages make sit worthwhile to adopt the Euro.
After all, the majority of our trading partners, with the exception of Britain, have embraced the Euro. They reason that the transparency requirements of the Euro Changeover rules after the introduction of the euro mean that the archaic method of applying currency translation charges can no longer continue, and therefore bank charges can no longer be hidden in a "spread". However, the only way to establish in reality whether the total costs to citizens will drop is for banks to make information publicly available showing the changes in the level of charges before and after the introduction of the euro.
As in the case of banknote exchange (emanating both from currency in circulation and vast foreign deposits in Euro ), transparency in this field is essential to alleviate any consumer concerns that they appear to be paying a new or much increased fee for the same service which was apparently without cost prior to introduction of the euro.
Certainly the only way to establish in reality whether Euro conversion will lead to deflation is for banks and, where appropriate, regulators to make publicly available information showing the changes in the level of charges before and after the introduction of the euro. Sceptics disagree stating that by its nature any introduction for a new national currency will tempt both bankers and retailers to hook up prices. But what about the advantages that are being advocated by the Central Bank?
It goes without saying that having a common European currency will add to price transparency and may facilitate a better flow of tourists.
Pro-Euro lobbyists laud the ERM mechanism saying it creates one end of the spectrum of possible international monetary arrangements that ranges from single currency (instead of “irrevocably”-fixed exchange rates) to freely fluctuating exchange rates at the other.
They further support the tightening of monetary rules among Euro zone countries. They are confident about untold positive aspects to the introduction of a collective European currency. Foremost of these aspects one notes the Euro’s utility deriving from its general acceptability and its resilient qualities compared to the Dollar. It lowers the chances of encounters with hyperinflation or extreme changes in economic convergence of national regimes. As a result, government apologists are very hopeful that the advantages out weight the pain. They all sing from the same hymn sheet chirping that once put in effect in January of 2008 the introduction of the Euro will open the floodgates for increased investment activity and higher economic growth.
Conversely, purists lament that Malta loses its latitude over its Central Bank functions. They also lament that from the political and economic aspect, the most significant and certainly the most obvious cost of joining the Euro is the loss of political sovereignty and monetary policy as a tool of demand management presumably the envy of any Central Bank. On conversion these powers are unconditionally yielded to the European Central Bank.
There is a lingering sense of nostalgia over severing ties with the lira. Given that since many years during the colonial epoch we had to show subservience to a sovereign monarch which was amply characterised on our sterling notes. Naturally this historical link culminated in the picture of the monarch emblazoned on our currency as a sweet reminder of our status as a colony.
Since independence we have grown accustomed to handle our own monetary affairs and redesigned our notes. Generally, the Maltese lira is identified not only with nationhood but also with the possibility of conducting domestic economic policy according to the preferences in which export business circulates. Only up to a decade ago the basket of currencies backing the lira included dollar, sterling and only recently the Euro. Little wonder then, that citizens in strong-currency countries, particularly Germans, did only reluctantly give up their currency with the hard-won stability of the Deutschmark. But then no pain no gain.
Naturally, a considerable amount of catching up has to be done now that we decided to join. One aspect is the rigid control over inflation which has given signs of surging upwards. Domestic inflation has shown signs of increasing as a result of more taxes, rampant increase in government agencies tariffs together with the surging cost of energy. In fairness we can console ourselves since the dangers of high inflation levels are the main problem of almost all accession countries.
In Malta’s case a very restrictive fiscal policy will be needed if both the inflation rate and the budget deficit are to be reduced within a short period of time of less than two years. Here is where the dilemma sinks in. To cut the deficit you need more taxes which in turn may stifle the green shoots of an economic recovery.
A lot has been written on the cost of excess manpower in state employment. It is to be remembered that one out of three workers are dependent on the public purse. This is a huge overhead in unproductive resources but then as happens in most emerging countries politicians are bound to cocoon such workers who for electoral policy reasons are treated as a sacred cow.
All this leads to the tightening of the annual deficit and to trim the accumulated national debt which currently exceeds the 60% threshold. It is obvious that sacrifices are inevitable. We have to contend a tad longer with potholes and broken kerbs while our environment has to wait for its long overdue embellishment. Although a lot has been remedied in building of new arterial roads financed out of foreign grants it is likely that capital expenditure, especially investments in infrastructure, will likely have to be curtailed. If this was not for a temporary period one can say that this is a dangerous road to go down and unless a good public relation exercise is hastily conducted voters may attribute the decline to the Euro.
There will be some pain in the next two years and unless we motivate all stakeholders to manage the change the end result may be a drop in living standards due to inflation which ironically goes against one of the central aims of European integration.
Unquestionably the advantages of the Euro are long term. Taxpayers may well rejoice with the notion that joining ERM fosters more discipline on the political class and reduces profligacy which was the cause of the burgeoning national debt that has exceeded EUR3 billion over the past 19 years.
Paradoxically, a concerted effort by government to reduce the deficit in the next two years with all things remaining equal may have a negative neutralising effect and in turn diminish the economic growth rate.
So how can we think of a solution out of the box? Certainly, privatisation proceeds have in the recent past helped reduce the strain on the public purse. But this is a limited source of income given that the finer parts of the family silver have already been auctioned. Another solution is the advent of enhanced growth in the financial services sector which is linked to a faster pick–up once we join the Euro. Otherwise, the stability of the Euro and price transparency will hopefully energise our economy to start firing on all cylinders. Citizens of the smallest EU member state can then rejoice that after the pain they can settle down to an established currency, higher foreign direct investment and possibly a drop in interest rates.
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