Beyond the 'u' and 'w'

Excitement and controversy is building up on whether we will be allowed to write euro or ewro in Maltese. As we have joined the European Union as a sovereign nation state and not as a colony, we - and not a European institution - should decide how to write ewro. But beyond the spelling controversy we should be having an open and healthy debate about the adoption of the euro.

Government is considering the adoption of the euro as primarily a technical matter. Other countries that joined the EU with us are considering the issue as political and economic with an impact on the people's quality of life and the economy's competitiveness.

For example, this is what The Financial Mirror (May 5, 2005) said about the economic impact of adopting the euro on the tourism industry of Cyprus: "The immediate impact is negligible, since the EU already supplies some 75 per cent of incoming tourists, but there will be gains for the hoteliers and tour operators in terms of lower borrowing costs. In the long term, the impact is seen as negative since euro adoption will immediately bring to the fore the relatively high prices prevailing here compared to other destinations as well as in some EU countries from where we are receiving tourists."

Should we not at least explore the possibility of the same negative repercussions here in Malta? Is it wise to ignore the negative effects when there is proof that islands heavily dependent on tourism have been affected badly since they introduced the euro and the number of tourist arrivals has declined, as they have become more expensive than their competitors?

A study carried out by Joe Kanada at Stanford University concludes that since Spain adopted the euro, tourism in the Spanish island of Tenerife has been affected negatively. In the last two years Tenerife has lost over 125,000 tourists as it has become more expensive than its competitors. The study shows the euro having a positive effect on mainland Spain, where tourism constitutes a small part of the national economy, and a negative effect on Tenerife where three- fourths of the economy depends on incoming tourists.

The higher prices caused by the adoption of the euro outweighed the other beneficial effects of the euro. The same study concludes that the adoption of the euro will be detrimental for Malta, as it will become a more expensive and less competitive destination.

We have the advantage of adopting the euro after other countries, so we can learn from the experience of other small islands (Spanish, Greek, French and Italian) whose economy depends a lot on tourism and have already introduced the euro. I have been urging the government to set up a task force to study the positive and negative repercussions of adopting the euro and to formulate a strategy aimed at mitigating as much as possible the negative impact on tourism.

Government sees no point in setting up such a task force, considering the adoption of the euro as an act of faith and simply a technical matter to be dealt with by the changeover committee and has no doubt whatsoever that the positive effects of the euro far outweighs the negative ones.

More expensive

When Malta adopts the euro, tourists coming from the Eurozone will gain, as they will incur no costs involved in purchasing/reselling foreign currency. Tourists from the Eurozone will have more money to spend in Malta and Gozo. Tour operators and hoteliers will benefit from lower interest rates and the elimination of exchange rate premium and so their borrowing to finance their operations will cost less.

But by adopting the euro, Malta will surrender its monetary policy interests to the greater policy interests of the European Union where tourism matters less. Malta will give up the option to devalue the lira to regain price competitiveness as a tourist destination. All pressure to maintain price competitiveness will fall on domestic costs, wages and productivity gains.

The United Kingdom is still pivotal to Malta's tourism and as long as the British government keeps the country out of the Eurozone Malta would no longer have control on the relation between the pound and the euro. Although it is definitely not the only factor, the exchange rate variable also helps to determine the price of tourism.

We need to know how the adoption of the euro is going to impact our price competitiveness as a tourist destination. Forty per cent of our tourists come from the Eurozone, 60 per cent come from outside it. A study carried out for the Malta Tourism Authority in August 2002 on "The Price Sensitivity of Tourism Demand in Malta" concluded that "International price competitiveness is an important determinant of the level and pattern of tourism demand across countries and it is crucial that national tourism authorities provide a policy context within which tourism suppliers can compete effectively if they are to avoid losing out their tourism market share to competitors."

The study also stressed: "Government policies play an important role in influencing both inflation rates and exchange rates. Knowledge of the effects that their policies have on tourism demand is necessary if they are to preclude adverse repercussions on this core economic activity, along with the spill-over effects on other sectors of the economy."

"The Price Sensitivity of Tourism demand in Malta" also pointed out: "Overall, price increases in Malta have considerable adverse effects on the demand for tourism from all its main markets. Malta's price competitiveness has been declining relative to the UK, Germany and Italy... The implications are that the price competitiveness of tourism in Malta is a serious cause for concern. If effective price competitiveness continues to worsen over the long run, tourism demand will decrease considerably, with significant adverse repercussions for the wider economy."

Since the study was carried out, tourist arrivals have risen but foreign currency receipts from tourism have fallen and are lower than Malta's competitors. Costs for our tourism operators have continued to rise making it more difficult for them to compete with other rival destinations.

Government is still not addressing these and other serious issues that are contributing to us becoming a declining destination in urgent need of rejuvenation.