Euro application: What next?

On Tuesday, the government presented to the European Commission and the European Central Bank a request for an assessment of whether Malta has attained the Maastricht Convergence Criteria. These criteria must be met, in their entirety, by EU member states aspiring to join the eurozone.

This is an important milestone on the road to euro adoption. This journey started on May 1, 2004 when Malta joined the EU. By signing the Accession Treaty on April 14, of that same year, Malta committed itself to join the Economic and Monetary Union thereby sharing the single currency. In fact, just like the other new member states, Malta was admitted into the EMU as a "member state with a derogation", meaning that, while Malta was exempted from joining the eurozone immediately, it was to do so once the convergence criteria were met.

These criteria request a budget deficit of under three per cent of GDP; a public debt which is lower, or sustainably approaching 60 per cent of GDP; an inflation rate, observed over a period of one year before the examination, which cannot exceed by more than two percentage points that of the three best performing EU member states in terms of price stability; and an average nominal long-term interest rate not exceeding that of the three best-performing member states in terms of price stability by more than two percentage points. The currency of the member state should have respected the normal fluctuation margins against the euro provided for by the Exchange Rate Mechanism of the EU without severe tensions for at least two years before the examination.

Considering that this last requirement refers to a two-year timeline, the first logical step towards adoption of the euro was participation in the Exchange Rate Mechanism (ERM II). Malta joined the ERM II on May 2, 2005. Joining the ERM II entailed the full pegging of the lira to the euro and, consequently, the fixing of a central parity rate for the national currency against the euro. While the criterion for joining the euro is to participate for two years in the ERM II without fluctuating the central parity rate by more than 15 per cent, upwards or downwards, the government had declared its commitment to maintain the rate fixed as established on the date of accession into ERM II, that is at 0.429300.

The application letter submitted by the Prime Minister and the Governor of the Central Bank will now prompt the European Commission and the European Central Bank to draw up a convergence report assessing Malta's adherence to the Maastricht Criteria.

The two convergence reports, which are likely to be published concurrently in May, will then form the basis of a proposal by the Commission to the June Ecofin Council. Ecofin will debate the convergence reports and refer the proposal together with the outcome of the debate to the June heads of government Council meeting.

The European Parliament will be asked for its recommendation on the basis of the convergence reports and the Commission's proposal. The June Council will then examine the Commission and the ECB's reports on progress made by Malta on convergence as regards European economic and monetary union, and discuss a proposal aimed at allowing Malta to adopt the euro as its currency from January 1, 2008.

In the likelihood of a positive assessment by both the Ecofin Council and the European Parliament, the head of government will request the July Ecofin Council to decide on Malta's entry into the eurozone as of January 1, 2008.

The July Ecofin Council will first of all abrogate Malta's derogation on participation in the EMU. It will also decide to confirm Malta's target date for the adoption of the euro as from January 1, 2008 and adopt a regulation fixing the irrevocable conversion rate between the lira and the euro, thereby amending regulation 2866/99.

Last year three countries had originally intended to apply for a convergence report. However, Estonia dropped out, whereas Lithuania and Slovenia requested a convergence assessment. While Slovenia made it through rather smoothly, the Commission did not make a positive proposal with respect to Lithuania.

The submission of a request for a convergence assessment, therefore, kicks in a whole process of analysis, discussion and debate on whether Malta should form part of the eurozone.

Meanwhile, the National Euro Changeover Committee continues to unfold its information and educational campaign while working on the technical preparations required to enable the adoption of the second strongest currency in the world.

Mr Zahra is executive, technical preparations, NECC.