FOI conference on euro's impact on business

Following the write-up in the last FOI column (The Sunday Times, January 26), on the FOI conference "The euro - the impact on business", here is a summary of the presentations of some of the key speakers at last month's conference.

Readers wishing to obtain a copy of the speeches and presentations delivered at the conference are to contact the FOI Secretariat on tel: 21234428, 21222074.

Peter Blackie from the European Commission's DG for Economic and Financial Affairs, who heads the Information and Communication Division, delivered two presentations at this conference.

In his first presentation, he outlined the history of European integration, as well as that of monetary integration. He also highlighted the advantages of the euro, including the elimination of transaction costs; transparency of prices; credibility to and visibility of monetary union; and economies of scale related to financial markets.

He then explained the four major reasons, which led to the creation of the Economic Monetary Union (EMU), namely: the pressures on competitiveness due to globalisation; the receding dominance of Keynesian theories; the need to re-balance the International Monetary System; and the importance of EU deepening following the fall of the Berlin Wall.

The European Commission official started his second presentation, which was entitled "The Conditions for joining the Euro Area", by stressing the importance of economic co-ordination within the Council, referring to, among other aspects, the Stability and Growth Pact.

Mr Blackie then explained the various forms of policy co-ordination and highlighted not solely the policies that can be used and their respective form of co-ordination, but also the mode of co-ordination, actors involved and procedures to be followed.

He outlined the convergence criteria to be followed, including the required price stability, budget discipline, convergence of interest rates and exchange rate stability, as well as other criteria that would be applied, including the required independence of the central bank; integration of markets; current account criteria; and unit labour costs and other price indices.

Mr Blackie then explained the principles and steps of candidate countries' path to adopting the euro, referring also to the conclusions of the ECOFIN Council meeting held on November 7, 2000, which highlighted the exchange-rate strategies for accession countries.

The European Commission official concluded by explaining the results of the EMU, and highlighted the culture of stability, the opportunities and the challenges the EMU provides business operators.

"Since internal borders were removed ten years ago, it is estimated that the Single Market has helped to create 2.5 million extra jobs; the EU's combined GDP in 2002 was 1.8%, or €164.5 billion, higher than it would have been; and each household was on average €5,700 better off.

"Market opening is, therefore, not only good economics but also very good social policy."

This is a summary of Central Bank of Malta Governor Michael Bonello's speech:

"Further benefits can be expected to flow from the introduction of the single currency. A recent study has in fact suggested that currency union approximately doubles trade.

"And specifically with regard to the euro, another study has concluded that in the case of Hungary, euro area membership may raise the GDP growth rate by 0.6 to 0.9 of a percentage point in terms of a 20-year average."

Thus, the euro "lies at the very heart of the EU and it is therefore no surprise that EU membership carries with it an obligation to participate in EMU and to adopt the single currency".

Mr Bonello focused on the implications of the exchange rate criterion, which relates to the Exchange Rate Mechanism (ERM II) and falls within the competence of central banks.

He explained the implications of the single currency for exchange rate policy and highlighted timing issues related to entry in ERM II, as well as issues raised by Malta's prospective participation in ERM II, including the issue concerning the level of the central rate and the size of the fluctuation bands.

In fact, the CBM governor stated: "Given Malta's dependence on foreign trade and investment, the (Central) Bank's commitment to price stability and its positive track record with a fixed peg, a narrow band, and the lesser degree of uncertainty and volatility associated with it, would be preferable."

He also explained the implications of the single currency for the composition of the external reserves. Mr Bonello went on to explain the operational framework for market operations and reserve management that would have to be attained and the implications on the Central Bank.

He also explained that both the Central Bank of Malta and the European Central Bank (ECB) would require continuous access to the necessary information to enable them to gauge whether the payment and settlement systems are performing well.

Central banks of accession countries would thus assume statistical reporting obligations, as well as having to be equipped with the necessary technological and operational infrastructure and communication facilities to enable it to receive information from reporting agents and to forward it to the ECB.

In the first section of his presentation, Gordon Cordina, a renowned economist in the local sphere, highlighted economic policy matters for business relating to fiscal policy, monetary and financial policy and well as structural policy.

He then discussed how the adoption of the euro will affect economic policy in view of economic convergence, both before adoption (focusing on policies towards nominal convergence in anticipation of loss of interest rate and exchange rate autonomy) and after adoption (focusing on fiscal and structural policies to maintain fiscal balance and further real convergence), as well as the policy implications.

Mr Cordina then highlighted how the adoption of the euro would improve the economic policy environment, in view of monetary, fiscal and structural policies, explaining also the measures in Malta's Pre-Accession Economic Programme (PEP) related to the enterprise sector (like loan guarantee schemes, private-public partnerships, the removal of levies, business restructuring, fuel pricing and privatisation), the labour market (e.g., the setting up of MCAST and the Employment and Industrial Relations Act), as well as the fiscal sector that the fiscal deficit is to be reduced to 2% of GDP.

At the end of his presentation, Mr Cordina highlighted the policy pitfalls for Government to avoid when eventually the euro is adopted, including those related to: the insufficient pace of reform; excessive speed in adopting euro; and lack of cohesion among social partners.

"The key to unlocking the question on (whether firms are prepared for) the euro consists of a three-step approach that will help firms with the changeover to the euro."

The presentation of Ray Ellul, manager at the Investment Banking Department in the BoV Financial Markets Division, revolved on this "three-step approach". Mr Ellul explained that a firm should first "conduct a business assessment: how will the euro affect my strategy and operations?"

Mr Ellul highlighted factors that should be analysed, which would increase and mitigate the impact of the euro for each party, namely customers, competitors, products and/or services, suppliers, organisation, and business partners.

The next step would involve the firm formulating its strategic and operational approach to the euro, with the firm having to decide whether it would be pro-active or reactive in its strategic approach, as well as defining when and how the firm would start working in euros internally or externally, and determining the operational implications on people, processes and systems.

The final step would be "to develop an Action Plan to implement the selected approach". Mr Ellul also recommended that a firm should set up a "euro team" involving, among the team members, the owner and management, so as to take timely decisions.