As Malta prepares for the changeover to the euro on January 1, 2008, the country must continue to aim at passing the five tests, which will decide whether it is allowed to join or not. It is expected to pass these tests by May 2007.

We are summarising them here again for the benefit of readers.

Test 1 concerns inflation. Malta's rate of inflation, taken over an average of a year before the decision is made to go ahead, must not exceed by 1.5% the average of the three best performing EU member states in terms of price stability.

This has been the most single worrying test for Malta. Malta's rapid economic growth does not make it easier to contain inflation. However, a balanced fiscal and monetary policy could neutralise inflation's sting.

Test 2 focuses on interest rates. In this case the interest rate on a 10-year government security must not exceed by more than 2% the average in the best three performing countries. This indicates that economic growth prospects are good because long-term interests have stabilised around those current in the Eurozone's economic front runners.

Test 3 concerns government spending, which if allowed to run out of hand, could have a devastating effect on measures to control inflation. The deficit in government finances must not exceed 3% of gross domestic product (GDP).

Malta is well on track to achieve this criterion. The additional benefit of this requirement is that Government has to be prudent with its expenditure, both before and after Malta adopts the euro. Taxpayers should be delighted.

Test 4 requires that the stock of government debt should not exceed 60% of GDP. Malta would definitely not be near to achieving that target. However, a downward trend in the size of the public debt stock is sufficient.

In this case the benefits of maintaining a low debt to GDP ratio does not need to be overemphasised. How will Malta eventually adopt this criterion? Partly by repaying this debt and partly as a result of the growth in GDP, which will render the debt smaller in percentage terms, even if it does not actually decline in absolute terms.

Test 5 requires countries to participate in the exchange rate mechanism (ERM2) for at least two years in which the currency remains within the normal fluctuation margins around the agreed central parity.

The Maltese lira joined ERM2 in 2005 and its exchange rate became irrevocably fixed at around €2.33 = Lm1. This is not a difficult position to maintain for a currency such as the Maltese lira, whose value is fixed in relation to a basket of currencies.

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