Central Bank Governor warns against euro delay

The Governor of the Central Bank yesterday underlined the negative repercussions of delaying the introduction of the euro at a conference which emphasised the need to stem inflation fears and to carry out an intensive information campaign.

A European Commission official advocated the need for compulsory dual pricing to avoid ambiguity once the European currency comes into force in January 2008.

The whys and wherefores of the euro were debated during the conference organised by the National Euro Changeover Committee, which yesterday launched its second updated master plan.

As the Labour opposition continues warning against the early introduction of the euro, Central Bank Governor Michael Bonello gave a detailed presentation to prove otherwise.

He said that early adoption made economic sense and the benefits exceeded the costs. The economic structure in Malta already resembled the euro areas and the level of economic development here was relatively high.

To back up his arguments, Mr Bonello said that local markets were already integrated with European ones, and Malta had a positive experience with a fixed exchange rate. Rating agencies had made it clear that Malta's road towards the euro earned it a positive outlook. In fact, Standard and Poor's recently revised Lithuania's outlook downwards after the EU postponed its euro adoption date.

Malta's rate of exchange was vulnerable and delaying the process further could be harmful, the Governor warned. Mr Bonello said the benefits of the euro varied across countries but various experts had concluded that small states should benefit the most.

Statistics had shown that in the euro's first five years, intra-euro area exports and imports increased by between six per cent and 15 per cent. For the new member states, the euro should translate into an annual GDP increase of one to two per cent. It is estimated that the introduction of the euro in Austria led to annual savings of 0.8 per cent of GDP in foreign exchange transaction costs.

The Governor urged those present to realise the actual implications of joining the euro - suffice it to say that tourists' cash can lose up to two-thirds of its value without making a single purchase, simply through currency transactions.

The participants at the conference debated the issue of dual pricing, a bone of contention especially among retailers who fear an increase in costs.

Nabil Jijakli, from the European Commission's DG Economic and Financial Affairs, said it was those countries that were meticulous with the changeover process that had faced the smoothest transition.

A flexible but compulsory system of dual pricing should be introduced to educate consumers, he said, complementing the work of the NECC.

Citing a Eurobarometer survey to be released next week, Dr Jijakli said that most respondents expressed their wish to be well informed well before the euro introduction.

Though most citizens believe the euro will lead to a price increase, in reality its introduction in 12 EU states led to a maximum 0.3 inflation rate. The authorities should however, keep a close watch on day-to-day items, like coffee, Dr Jijakli said.

Parliamentary Secretary Tonio Fenech said that the longer the dual pricing system is delayed the more unprepared the public will be. He applauded two large supermarkets that have taken the initiative to introduce dual pricing from now.

While admitting that the country's rate of inflation was the most worrying aspect which could derail euro entry, he insisted that the government would do everything within its remit to ensure this does not happen.

Mr Fenech explained there was no point in extending the dual use of the lira and the euro beyond January 2008. The experience of other countries has shown that people would want to use the new currency once it comes into circulation.

NECC official Alan Camilleri warned that the anticipation of inflation once the euro comes into circulation could actually generate inflation. In an open economy, the consumer has the means to fight it, Mr Camilleri said, adding, however, that the authorities will be keeping a watchful eye on the products most vulnerable to change.

NECC chairman Joseph Zahra said the master plan had established clear guidelines and deadlines to ensure a smooth changeover. "We are keeping everybody informed of our world; there is utmost transparency," he said.

Cash changeover outlined in master plan

¤ The CBM estimates that about 50 million Maltese lira notes, worth about Lm500 million, and about 200 million coins will be returned between the last week of November 2007 and January 2008.

¤ At least one ATM in all major localities will be dispensing euro notes from midnight of December 31, 2007.

¤ From January 2, 2008, credit institutions will start accepting the exchange of lira notes into euro notes and coins, free of charge.

¤ The free convertibility of cash amounts will span a period of three months after euro day, until the end of March 2008.

¤ All bank accounts denominated in lira will automatically be converted free of charge at the irrevocably fixed exchange rate to euro on E day.

¤ Bank customers may issue cheques denominated in lira up to December 31, 2007. From January 2008, cheques in lira will be dishonoured.

¤ Electronic payments in lira will only be accepted up to December 31.