Euroing in the dark

The government, advised by the Central Bank, seems likely to begin the process to adopt the euro as our currency, subject to satisfying stipulated EU criteria. The Prime Minister repeatedly signals that it should happen sooner rather than later. He asserts positives, without letting the public know what supports his claims.

Ministers and parliamentary secretaries spent part of the weekend locked up to mull over a joint report by Finance and the Central Bank. The government did not release details. The Bank is even more tight-lipped towards the public.

Frank internal exchanges have to take place. But why to the exclusion of informed public discussion?

It is unclear why the Central Bank was not asked for its own views by the Cabinet but was made to join the Finance Ministry. However the Cabinet decides its menu, or it is decided for it, the Bank is best placed to advise the public what the euro is about and what joining the EU mechanism, known as ERM II, would mean. Only it can say how it sees the timing of the inevitable move.

The Central Bank would not be in breach of its role or even unduly bold were it to take some public initiative. Similar institutions within the new EU states set out their position and made public their conclusions and recommendations quite before their country acceded. That enabled informed exchanges of view to take place. Such a process here, albeit late in the day, should also benefit the authorities.

The Cabinet is deliberating outside the context of any broad technical discussion as if this too were some secret strategy. The PM, who is also directly in charge of Finance, motivates his vibes of urgency by pointing out that other new members have declared themselves. He feels Malta would lose out if it missed out joining ERM II at the first coming opportunity.

The PM also persistently signals that the current euro/Lm exchange rate is broadly right. The public does not know what the Central Bank is saying exactly in that regard, what are the for and against inputs that lead to a net balance of opinion.

The Governor and his Bank colleagues have expertise and experience. They can access important technical advice, from the International Monetary Fund and the European Central Bank. That should also be made available to the public - the main stakeholders in Malta's autonomous Central Bank.

Should the Cabinet lock Malta into the euro process at what turns out to be the wrong parity, the outcome would go diametrically against the basic object of joining ERM II to start the process of adopting the euro. The single currency is central to the EU policy of convergence. Deciding about the process of joining it is seen as helping to stabilise exchange rate expectations. Locking within and later assessing the effects of definite exchange bands in ERM II should help contain inflationary and other disturbances caused by fluctuating exchange rates. That argument is limited by the UK being out of the eurozone and the fact that a substantial part of our imports and exports is still denominated in the gyrating US dollar.

Yet there can be no doubt that policy direction has to be towards the euro. The point at issue is: Why should the government take us there without proper widespread discussion, particularly to become clearer about the rate at which we should lock in with the euro? Joining ERM II will not finally decide that rate. But, if the step is taken unnecessarily early there could be a very heavy economic and social price to pay.

As things stand, the exchange rate of the lira is set through a link 70 per cent based on the euro. Though we are out of ERM II there is nothing to stop the monetary authorities from moving to increase the euro link, even up to 100 per cent, to test how that affects competitiveness, imports and exports, and inflation. That might also help to ease the Prime Minister's concern that we must make haste.

Haste is never the wisest spur to action. Undue haste leading to a mistake on this fundamental policy issue would make a sad joke of the government's objective to improve competitiveness. The PM, one should presume, would have noted that the Central Bank is losing official reserves. By January its holding of foreign assets had declined by Lm82.2 million (8.8 per cent) below the level of January 2004.

Any indication of a hasty decision regarding the road towards the euro could cause confidence in the lira to wobble and accentuate the loss of official reserves through accelerated conversion of domestic savings and financial investments into foreign currency assets. The Central Bank knows that better than the rest of us. Its public silence is not a golden reserve.