'Difficult to imagine' Malta having to pay fine

A scenario where Malta would have to pay a Lm10 million fine per year to the European Central Bank once it adopts the euro because of excessive currency in circulation "is difficult to imagine, if not impossible," the Governor of the Central Bank of Malta, Michael C. Bonello, told the Parliamentary Public Accounts Committee yesterday.

The governor was answering questions after speaking about the monetary policy mechanism and the way in which the Central Bank maintains price stability.

The focus of much of the sitting was on the recent allegation that the adoption of the euro would eat away the Central Bank's profits due to a fine it would have to pay owing to a high amount of money in circulation.

The Labour press had reported that according to the rules of the European Central Bank, countries which adopted the euro would be fined if they exceeded an established per capita quota of banknotes and coins in circulation. In Malta, money in circulation is three times more than the EU norm.

The Central Bank, Mr Bonello said, had already refuted the claims.

Replying to questions put by the committee's chairman, Charles Mangion (MLP), Mr Bonello argued that it was impossible to say with certainty what could really happen, but the bank had contemplated two realistic scenarios to show that what had been alleged was a highly unlikely scenario.

He said that if the value of the euro in circulation worldwide increased by an average of 10 per cent each year and the amount of money in circulation in Malta remained unchanged as at the end of 2005, the effect on the Central Bank of Malta over seven years from the adoption of the currency would be neutral - with a net benefit (from profits from euros in circulation worldwide) in the first three years and a net loss in the next four years. At most, the net loss would amount to around Lm700,000. However, from the seventh year onwards, the bank would benefit all the way.

In reality, Mr Bonello explained, the average annual growth of the euro in circulation over recent years had been of 13 to 14 per cent while the amount of money in circulation in Malta had already started decreasing and was expected to decline further. The only circumstances under which the bank would have to pay a Lm10 million fine would be if money in circulation in Malta increased sixfold, or if the amount of euros in circulation in the world decreased by half.

Mr Bonello explained that upon euro adoption, the assets that the Central Bank today held as external reserves would no longer represent counterparts of the domestic currency, but rather assets held against euro deposits and Malta's share of the euro currency in circulation.

There were a lot of factors at play - including changes in international interest rates, the level of deposits held by commercial banks with the Central Bank, the currency in circulation, both in Malta and in the euro area at the time of adopting the euro, as well as by any decisions which might be taken at the level of the European Central Bank. The Governor observed that the Central Bank's stand had been unequivocally backed and confirmed by comments given to The Times by the European Central Bank in Frankfurt, which had stated that it was impossible to say with any precision whether the Central Bank would be "worse off" in absolute terms after euro adoption, or if so, by how much.

Dr Mangion asked how the Central Bank had advised the government to go ahead with membership of the exchange rate mechanism (ERM II) if it had no certainty of how this mechanism would affect the Central Bank. Did this imply that the engagement in ERM II had been hurried?

Mr Bonello said the bank had been requesting information from the European Central Bank on such issues but it was only recently that the ECB started providing such information, not least because only Malta had such large amounts of money in circulation per capita.

Dr Mangion said that it was important that an analysis took account of all possible scenarios, including issues related to the profitability of the Central Bank.

Mr Bonello said that this issue did not make a difference as to whether Malta should adopt the euro or not.

Parliamentary Secretary Tonio Fenech said the decision to join ERM II had been taken on the basis of wider economic considerations and not simply on a technical element on how the profitability of the Central Bank would be affected. For the government, the profitability of the Central Bank was a secondary consideration when deciding the right time to adopt the euro.