To choose sensibly

It is not surprising that an exchange of ideas between ivory tower and professional economists on depreciation/devaluation has turned into a polemic. Unfortunately, they failed to make it clear that their suggested exchange rate adjustment was primarily intended for the choice of an advantageous rate of exchange well before Malta is ready to join the Exchange Rate Mechanism (ERM).

For, be it noted, ERM imposes requirements of monetary and interest rate policy and domestic fiscal policy. Therefore, before joining the ERM the government will have to make up its mind, to agree an entry exchange rate for the lira.

A professional economist did, however, write that "Malta has to retain the political freedom not to lock into the euro at a damaging rate" (my emphasis). Perhaps he had Germany in mind. But Malta is not Germany. A damaging rate in our case would cause us interminable harm. Worth noting also that Greece had devalued the drachma before joining the euro. Such a step will not be possible for, or better, allowed to Malta.

With a depreciation quantities of exports and imports usually react to a change in the exchange rate with a time lag; a devaluation in the short term has the effect of increasing the cost of imports and inflation.

So a gradual depreciation may be better to adjust an overvalued exchange rate to the desired lower level, that is to get an advantageous rate before eventually joining the euro.

Most of the economists in question doubted the real exchange rate as presented by the Central Bank. It is perhaps needless to say, though it needs emphasising nevertheless, that the choice of a nominal exchange rate for the purpose of joining the euro will be permanent, but the real exchange rate - the price of our outputs relative to Eurozone outputs - will surely change over time.

So joining the euro at an uncompetitive exchange rate will not only make our exports relatively expensive but will cause us considerable damage. And if and when the one-size-fits-all interest rate for the Eurozone becomes too high for Malta, that damage would be next to disastrous.

For one must never forget that once Malta joins the euro it will be goodbye to monetary policy, exchange rate adjustment and interest rates tailored to Malta's economic needs.

The first rule of the ERM is that each member's currency would be assigned a "central rate". That is to say, that no member can unilaterally fix its own "central rate". In other words, no member "retain(s) the political freedom" to choose its exchange rate.

The quaint opinion expressed by an economist regarding backing the currency in accordance with the level of reserves at the Central Bank harks back to the days of the classic gold standard.

In conclusion, it is worth mentioning the following:

First, it has been said that the ERM is a mechanism for keeping poor countries poor and shielding the rich from the more competitive environment that the Single Market was supposed to bring.

Secondly, William Nölling, chairman of the Landeszentralbank (state) and a Bundesbank (federal) council member, put it very clearly at the beginning of 1991, saying: "We should be under no illusion - the present controversy over the new European monetary order is about power, influence and the pursuit of national interest" (The Rotten Heart of Europe by Bernard Connolly).

And I say, unhesitatingly and unequivocally, could Malta ever have an iota of power and influence to pursue its national interests within the European Union?