Malta and the euro

Since the long debate about EU membership for Malta has now thankfully been settled, it is clear that the euro will constitute the next bone of contention for the country to discuss.

At the outset, I sincerely appeal to our leaders not to drag this subject into the political debate as they did with the EU membership question. The euro is purely an issue of monetary economic policy and has nothing to do with party politics.

The minute we politicise this topic, we lose our freedom to discuss the subject in a mature and objective manner. This would undermine our country's chances of reaching the optimum decision for its long-term economic benefit.

During the negotiations with the European Union, Malta managed to bargain reasonable accession conditions which made it worthwhile for the country to join.

The electorate certainly expressed this decision in the referendum and general election last March and April. In my opinion, given the circumstances of strong polarisation, we could not have achieved a better package.

Had we all pulled in the same direction, however, we might have even achieved better results. It is, therefore, imperative not to undermine the national interest on this issue and ensure that we do achieve the best conditions for the country with regard to joining the Economic and Monetary Union (EMU).

The single currency promises several advantages for the Maltese economy especially in the light of its strong outward orientation. These benefits have been mentioned before and include full price transparency across national borders for international trade and tourism (both outward and inward), increased competition to the benefit of consumers and the disappearance of cross-border transaction costs and exchange-rate risks.

Malta is also likely to benefit from the development of more integrated and competitive European credit, debit and equity markets due to the removal of all remaining exchange control restrictions. As a result, the euro is expected to bring lower interest rates on loans, including mortgages.

Of course, our policy makers must weigh these advantages against the disadvantages associated with replacing the Maltese lira with the euro and joining the new Exchange-Rate Mechanism (ERM II).

With regard to the latter, the main question is whether a fixed exchange rate is beneficial to our country. This would deprive us from controlling our own monetary policy while constraining our fiscal policy as well.

Without the availability of monetary tools, such as currency devaluation - to achieve desired economic goals - the country might have to endure more painful and longer adjustment processes.

A second risk is that the monetary policy in the eurozone might not yet be appropriate for us as a new member state. Despite growing integration, mainly through intensified trade links with the EU as our main trading partner, the business cycle in the domestic economy might not yet be fully aligned with that of the eurozone.

Monetary policy in the EMU is based on the conditions of the eurozone in its entirety, of which our country would only form a minute part. If the Maltese business cycle is not synchronised with that in the eurozone, policies at EMU level will not be appropriate for our situation.

Policy limitations will start as soon as we accede to the Economic and Monetary Union and start aiming for compliance with the Maastricht criteria.

As we are all aware, our budget deficit must be held below three per cent of GDP, public debt should not exceed 60 per cent of GDP, inflation is not allowed to rise above 1.5 per cent of the average in the three best performing EU countries in terms of inflation while long- term interest rates cannot exceed the same rates in the three countries with lowest inflation by more than two per cent.

It has been concluded by economic analysts that the Maastricht inflation criteria is harsher for the candidate countries than it was for the initial members.

Attempts to meet it too early may come at the expense of economic growth and of a smooth transition. A paper by the European Banking Federation (FBE) concluded that nominal convergence according to the Maastricht criteria may not be the best way to achieve real growth and convergence.

Although the ultimate decision rests on the Maltese government, a more flexible process in order to give priority to economic growth and real convergence of per capita incomes is considered preferable. In this study, the European Banking Federation declared that "it might not be in the countries' own interest to press for EMU-membership at the earliest opportunity".

We too at the Chamber of Commerce concur with this idea. We strongly believe in the merits of participating in the Economic and Monetary Union and adopting the euro but, given the risks involved, we believe that Malta would best do so when we are healthy enough and suitably positioned.

One point certainly to consider is that the value of the euro against the US dollar currently stands at a four-year high, recently approaching the 1.2 mark.

Had the euro been our currency, the implications on exports would have to be analysed in view of the fact that this would render our exports dearer and less attractive to non-EU countries.

It is pertinent to note that EU markets at present represent around 50 per cent of Malta's total exports while eurozone countries only constitute 33 per cent.

Another point worth considering is that Malta has entered into a number of obligations which, a priori, are considered to be costly on the national coffers.

Here, I refer specifically to obligations regarding the agricultural sector and environmental considerations, among others. To my mind, meeting such obligations will make it even harder for the country to fulfil the Maastricht criteria on public debt and deficit.

As part of our EU accession negotiations, we have been granted a minimum of two years and a maximum 10-year period during which to make the step. I suppose that the decision taken for Malta will need to be coordinated, to some extent, with decisions related to other countries.

Even at the Chamber of Commerce level, at a meeting I attended in Budapest only last month with the presidents of national Chambers in the other nine accession countries, it was unanimously decided that our organisations "urge the responsible authorities to take urgent steps to pursue the synchronisation of economic, fiscal and monetary policies, in order to meet EMU criteria in a gradual and business-friendly manner".

At this meeting, it was also decided to urge our national authorities to reach a timely decision on the date of the introduction of the euro with due regard of business interests.

Closer cooperation between governments and other competent authorities is also warranted with a view to harmonising this process as much as possible across all candidate countries.

In this context, our Chamber certainly believes that once the target date has been decided, it would be vital for the government to make this known in order to reduce the element of instability as much as possible.

Meanwhile, the entire nation must not waste time in making the necessary preparations and altering our mindsets. We are all aware that the euro is a reality that awaits our country.

Malta as a country and Chamber members, in particular, must be well prepared to ensure that the opportunities involved do not translate into possible threats on their businesses.

With particular reference to the enhanced transparency in pricing and the implications of this on competition, Chamber members are encouraged to exploit this feature when sourcing their inputs as well as when competing with their eurozone counterparts.

It is our duty to ensure that the government gets it right in terms of the timeframe it chooses for Malta to adopt the single European currency while forming an integral part of ERM II.

The Chamber has made its views known and now looks forward to healthy discussion and consultation on the matter.

Mr Fava is president of the Chamber of Commerce.