The value of the lira

Noel Vella writes:
Can I have your views on the foreign exchange rate at which the lira will be converted into the euro?

I think the level of the lira is too high and is probably to blame, to a certain extent, for the problems the tourist industry in Malta is facing. I think the lira should be allowed to float freely for, say, one year prior to flipping over to the euro. This will allow it to achieve a true market level before Malta is irretrievably lumbered with the euro. Personally, I think that island economies are special and should not give up macro policy levers unilaterally.

I have grave concerns that the European Central Bank (ECB) will pay little, if any, attention to Malta's economic requirements when setting future rates.

I also think that in the near future France will withdraw from the euro unless it gains much greater political say and control over the euro. All to the detriment of Malta...

The lira-euro exchange rate will be set irrevocably once a decision is taken confirming Malta's accession to the eurozone.

One of the requirements for adopting the euro was precisely the need to test the country's ability to live with the current exchange rate. This is being done through membership of a system known as the Exchange Rate Mechanism (ERM II), which Malta joined in 2005.

The rate at which the lira entered ERM II was fixed at Lm0.43 for €1 (Lm0.4293 to be precise). This rate will need to be confirmed at the time that our currency is fixed irrevocably. But the expectation is that the rate will not be changed.

As to whether the actual exchange rate at which the lira will convert to the euro is too high or too low, there are different views.

My view is that the lira's value against the euro has been sustainable. Let us not forget that, even before joining ERM, the lira had long been tied to a basket of currencies with the euro as a major component and, therefore, its value has long been tied to the euro, first in large part, now completely.

And we can hardly say that reducing the level of the lira would achieve miracles.

In 1992, we devalued our lira in response to the ERM crisis. But this only gave us a temporary respite largely because of our very high dependence on imports. So I feel that, in our case, devaluation leads to higher import prices, inflation and higher wages. As a result, initial gains in international price competitiveness are lost very quickly.

On tourism, I think that what hurts us is not so much the value of our lira as our need to polish up our act and give better value for money. This can be done quite independently of adjustments to the exchange rate and the rate should not be an excuse to cover up our inherent shortcomings.

If one looks at the manufacturing sector, since we joined the EU we have witnessed a silent revolution with a steady shift of investment from traditional sectors, notably, textiles, to higher value-added sectors such as hi tech and pharmaceuticals. This proves we can be more productive and more competitive and increase our exports at the current exchange rate. It also proves we can offer value for money if only we focus on what we can do best and do it, shedding once and for all funny ideas that someone owes us a living.

We need to emulate this experience in other sectors too.

It is true, as the reader claims, that joining the euro would lead to the loss of certain monetary policy instruments, such as the possibility of devaluation, although I view this positively, not negatively.

It is true that the ECB does not decide on the basis of any one single eurozone country, but for the area as a whole. And it is also true that island economies may face different challenges than countries in mainland Europe.

But other gains are made that are fundamental to the economic and financial stability of our country.

For instance, our preparations to join the euro have enabled us to discipline ourselves into reaching financial targets, such as on public deficit, for the first time in several years. And, let there be no mistake, we only managed this because we had a firm timetable to adopt the euro. And it is no coincidence that when we were furthest away from EU membership we were also furthest away from these targets.

In the same way we did this, we can (and should) press ahead with other challenges that, if left untackled, will continue to hamper our competitiveness.

As for France - or any other euro country - pulling out of the euro, I am unable to predict that. But what is clear is that the euro has proved many soothsayers wrong by becoming a major international currency in just a few years.

Greater political integration within the eurozone would be beneficial for the success of the common currency. I view this positively because, historically, small countries have been the greatest beneficiaries of European integration. And I see no reason why Malta should not do the same. Provided, of course, we are determined to do so.

I, for one, will be proud that the euro will be our currency, hopefully, from next January. Having the euro in our pockets means we have all worked hard enough to get it there. And, no, it will not solve all our remaining problems. But we will certainly be in a better position to tackle them.

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