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Gerald Fenech
After all the pomp and circumstance, congratulations and self-aggrandisement (not to mention almost idolatry), Malta has finally been given the green light to join the Euro on 1 January 2008.
Apart from the fact that this decision was revealed by sister paper Business Today over two weeks ago, it has to be made immediately clear that the European Commission’s decision to admit Malta to the Eurozone was a qualified one, and that a lot of hardship and tough measures still lie ahead.
This is apparent from the statement issued by the Commission, which certain analysts, in their drunken fervour of jumping onto the “feel good” bandwagon, evidently forgot to read.
“Malta has achieved a high degree of economic convergence with the euro area and is ready to adopt the euro in January 2008. However, to ensure that euro adoption will be a truly successful story, Malta should pursue its efforts towards fiscal consolidation and towards preserving external competitiveness, including through policies fostering productivity growth.”
This undoubtedly means that although a lot has been done. We still need to implement reforms that will bring us up to scratch as a modern economy.
Let’s look at the criteria one by one and comment on Malta’s progress in these areas:
Inflation
The Commission observed that the average inflation rate in Malta during the 12 months to March 2007 was 2.2 per cent, well below the reference value of 3 per cent. It notes that there has been significant progress towards price stability and wage stability, added to increased competition in some product markets. In this sector, the Commission appears confident that low inflation levels will be maintained after Malta joins the Euro, which basically means that the effect on prices should be contained.
There is a warning note, where the Commission recommends a prudent fiscal stance to be adopted and continued structural reforms to improve the functioning of product markets.
Budgetary situation
The Commission observed that although the deficit was running at around 10 per cent of GDP at the beginning of the decade, this was brought down to 2.6 per cent in 2006 and is expected to be reduced further to 2.1 per cent in 2007: a remarkable achievement. On the debt side however, Malta is still technically in breach of the debt reference value of 60 per cent of GDP. However, it has managed to reduce this from a high of 74 per cent in 2003 to a low of 66 per cent in 2006 with this expected to go down further to 64.3 per cent in 2008. The Commission has also ended excessive deficit procedures against Malta alongside Germany and Greece.
Exchange rate and long term interest rates
Malta appears to be very much in line in these two sectors having already participated in ERM II for two years. The Commission notes that during this period, the lira has remained stable and has not experienced severe tensions. As interest rates go, Malta’s long term rate was at 4.3 per cent, well below the reference value of 6.4 percent and this is in line with low residual country risk priced in by markets.
Benefits
There are undoubtedly benefits to Malta joining the Euro area, amongst which one may count historically low interest rates. Price stability is another benefit which will definitely be brought about by joining the Euro, as this will effectively guarantee low inflation rates. Job creation should also be picking up in the near future with an annual growth rate of 0.8 per cent expected between 2007-08.
A single currency should also bring about reduced costs for travellers and our attractiveness as a tourist destination will definitely increase. The disappearance of exchange rate costs will also bring about lower costs for businesses especially in relation to invoicing and the updating of pricing lists.
Malta will also be part of a large trading market which has seen an increase in trade of around 4-10 per cent since its launch. Finally, Malta will have a strong and attractive international currency that is growing in importance and has also overtaken the dollar in certain sectors.
Responding to external shocks
Malta definitely has a lot to gain by adopting the Euro, but faster economic growth can only be achieved by an appropriate policy framework which is needed to ensure that the benefits of being part of a single currency are fully realised. Pursuing prudent public finances and implementing the necessary structural reforms that ensure flexible product, capital and labour markets, will help the Maltese economy to respond to external shocks whilst at the same time maintaining price stability.
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