Credit Suisse forecasts adoption of euro by 2008

One of the world's leading financial services companies, Credit Suisse, forecasts that Malta will be changing its currency to the euro at the beginning of 2008.

According to a study, published yesterday, the first "new" EU member states to join the euro will be Estonia, Lithuania and Slovenia in 2007.

Although Malta has just joined the Exchange Rate Mechanism (ERMII), considered to be the first stage of the euro adoption process, lasting two years, the government has still to decide when to formally adopt the euro.

Last month, Parliamentary Secretary Tonio Fenech made it clear in an interview with The Times that ERM membership doesn't automatically mean the introduction of the euro in two years' time. He reiterated that the government will only take a formal decision at the end of the process.

The final decision of when Malta should abandon the lira and start using the euro is the prerogative of the Maltese government alone, although the decision is normally taken after an in-depth study by the European Commission on the progress achieved in the two-year ERM period, followed by a positive recommendation by the EU Council.

But the government is not obliged to adopt the EU currency immediately after the end of this process and can postpone the euro adoption by years. Financial observers told The Times that the government might be tempted to postpone by a few months in view of the proximity of a general election, which is not deemed to be the right scenario for a currency overhaul.

Credit Suisse's study, however, expects Malta to abandon the lira in early 2008.

The study says the convergence process is not progressing at the same pace in all new member countries so the enlargement of the European Economic and Monetary Union (EMU) will take place in stages.

"Unlike when EMU was founded, the euro will be introduced as book money and as notes and coins without any transition period."

Credit Suisse says Estonia, Lithuania and Slovenia have covered the most ground on the road to monetary union. "They all joined ERM II in mid-2004 and will be the first central and eastern European countries to introduce the euro, probably at the beginning of 2007."

Malta is included in the second wave. "Latvia can be expected to join the EMU at the beginning of 2008, together with Malta and Cyprus. The next candidate to join will be Slovakia (beginning of 2009). It will take longer before the larger countries can follow suit: the Czech Republic is set to join in 2010, followed by Poland and Hungary in 2011."

In order to be able to join, the new EU member states have to meet the same convergence criteria that were in effect when the EMU was created in 1999, i.e. on budget deficit, government debt, inflation, long-term interest rates, exchange rate stability, and compatibility of national legislation with the provisions concerning the European Central Bank (ECB).

The study states that the candidate countries are responsible for making all necessary preparations and for switching from their national currencies to the euro. Based on the experience acquired when the EMU was founded, however, the ECB now imposes two conditions on the switch to the euro.

First, unlike at the original launch, euro notes and coins must be circulated at the same time as the single currency is introduced as book money. Second, the old currency, the lira in Malta's case, may only remain in use as a means of payment for a relatively short period of no more than two months maximum.

The Credit Suisse economists do not believe that the external value of the euro will ease due to countries with less developed economies joining the EMU. They state that, in actual fact, the exchange rate reflects the strength of the entire economic area using a given currency. Although it is true that the accession candidates do not weigh much economically, their economies are growing at an above-average rate.

"It is up to the large EU countries especially to boost their sluggish growth through progressive economic policy reforms. But the uncertainties surrounding the ratification of the EU Constitution are making this quite difficult at the moment. Besides, the strength of the global economy in general, particularly the US and Asian economies is far more important for the euro than the enlargement issue," it said.