Europhoria and the longer view

It would be churlish not to recognise Prime Minister Lawrence Gonzi's moment of glory. It is different from that of his two predecessors in the Nationalist Party. George Borg Olivier led Malta to formal independence. Eddie Fenech Adami led it into the European Union. Dr Gonzi led it into the Eurozone.

On Tuesday the EU Ecofin Council, made up of the union's finance ministers, voted for Malta (and Cyprus) to adopt the single currency, and confirmed that the our conversion rate would be €1=Lm0.4293, the central rate set when Malta entered the waiting chamber by joining what is known as the EU's ERM II mechanism.

The end result is an achievement. Malta had to satisfy its peers that it had converged enough with the criteria they had set for euro adoption, particularly in regard to the deficit in the public finances and the rate of inflation. It did so, and that, and a national debt declining relative to GDP at current market prices, cleared the way for the euro to become Malta's currency on January 1, 2008.

The Nationalist Party will now follow Dr Gonzi's cue and blare out incessantly "Hail to the Chief". The leader and PM could not rise to the occasion and resist giving that cue. In a media conference right after the Ecofin decision, he shot barbs at unspecified targets. "Three years ago," he said, "when we set our targets there was a lot of scepticism about whether Malta will manage to reach its goals... Today all these sceptics have a certificate from the EU that Malta has passed all the strict tests with flying colours."

That whetted Dr Gonzi's appetite for more of the same. "I personally thank all the sceptics who, through their doom and gloom, made us more determined to work harder and reach our objectives," he said.

It is only human to express satisfaction and preen a little bit when one gets the result one required. But the prime minister did so by implying that any sort of criticism is, for him, impertinent. Analysts who discussed the conversion rate, who weighed whether Malta should lock permanently into the single currency at this stage, and such like, were sceptics. At the end of it, he comes up with the disturbing revelation that sceptics made him work harder.

In administering the country one is expected to work hard as a matter of course, even if one is lauded and applauded by sycophants night and day, all the way. Administrators who want to be sure that their hard work is in the right direction should welcome critical analysis, rather than dubbing it scepticism. Critical evaluation should help to keep them and their troops on their toes, to re-examine themselves, their strategy and tactics to ensure that the work they do is in the right direction.

As reported in The Times (July 11), Tonio Fenech, the Parliamentary Secretary at Finance, commented in a more relevant manner. Referring to the preparations for the euro to come into circulation, he pointed out this was not the last step, but the beginning. "We now need to make sure that all is working well in the banks, the commercial sector and the public at large."

The Tuesday confirmation that Malta will adopt the euro at a conversion rate of 42c93 is only a beginning in a much broader sense as well.

Most definitely the euro changeover committee, which has done sterling work, has a lot more to do. The technical preparations referred to by Mr Fenech will need to be fitted into their slots as tightly as can be. The committee's twin campaign - to educate consumers, and to exhort (now with full legal backing) the commercial community to do things properly so that prices do not rise as a result of euro adoption - will have to be intensified. That campaign will need to continue after January 1 has come and gone.

The peril that abuse in converting Lm prices into euro will raise the cost of living cannot be simply talked away. Potential uncertainty and confusion among consumers, making them easy prey for abuse, will need to be focused on.

As the months roll by and the euro circulates more extensively, people will start losing sight of the conversion rate, but their pocket will be telling them whether they are worse off or not.

In basic terms, it is unlikely that it will tell them they are better off. Transaction savings by the business community are likely to go more to boosting margins, than into lower prices.

A deeper new beginning will come about in economic terms. I do not share much space with analysts who looked at the freedom to devalue as an important tool for economic management. Malta devalued in November 1967, when the lira was tied to the pound sterling, which at the time was sharply devalued by the UK Labour government.

That was not a measure taken in relation to the Maltese economy. We were pulled along, whether that was of use or not. In fact, Prime Minister Borg Olivier's immediately put forward legislation to break the automatic link with sterling.

The lira was deliberately devalued by the Nationalist government in 1992, as an independent policy measure. It did not quite work as intended. The reason was that Malta is heavily dependent on imports.

Devaluation raises the cost of living more than it does in most other countries, where consumption of domestic products is much higher than it is in Malta, leading to higher unit cost, higher supply prices and less competitiveness. Devaluation, therefore, although a policy tool in an independent monetary regime, could not really improve economic performance in our islands.

That was why the loss of that policy tool through locking into the eurozone does not worry me. Yet the managers of the economy have to be fully aware that competitiveness will now depend more than ever on unit costs. I remain firm in my belief that, on balance, being part of the eurozone should be a plus factor. But it would be foolhardy to expect, as the Gonzi administration seems to do, that the euro will miraculously attract new investment like a magnet and bring about an economic boom.

It is an important measure, but by no means automatically sufficient to allow us to rest on any laurels. The way forward continues to turn on one word - competitiveness. If, euro and all, unit costs rise relative to those of foreign competitors relative to various sectors of the economy, even those that are at the moment burgeoning, we will lose out.

Lawrence Gonzi, riding early europhoria, may turn his back on the longer view. He may once again dub such comments as scepticism, and choose to encourage more sneering at so-called sceptics along with the playing of "Hail to the Chief".

He would be very foolish, in economic terms, to do so. That would simply add to the lack of wisdom he is displaying in how he manages his Cabinet team, which is accountable not to the Nationalist Party, but to the public, and should serve the public interest alone.

There is no leeway for the government in terms of trying to manage the economy, whatever the ratings of the grading agencies. The only leeway available to the Prime Minister lies in choosing the election date in a manner that will be suited to his party's interests.

He may well reiterate otherwise, but one can be certain that what is now uppermost in his mind is the objective of winning his first election as leader. Should he lose, adoption of the euro in his time as prime minister will still earn him a chapter in the history books, but not much more than that.

Setting the right date for the general election will now be a major consideration for the prime minister. His party trumpeted the start of the election campaign weeks ago, signalling that he might call it before the end of the year. Even now there is a growing rumour that the general election will be held in November.

On the other hand, the deputy prime minister has very carefully pressed the point that the PM is not obliged to call the election before August of next year.

Which way will Prime Minister Gonzi jump? With the Nationalist government unravelling and the groans and moans getting louder, he could emulate Labour's Karmenu Mifsud Bonnici in 1987 and hold out to the bitter end.

That is unlikely. If, on the other hand, Dr Gonzi sets the election date for February rather than, say, May, that would be a sign he too sees a probability that the euro, among other things, will bring along higher prices because of abuse.

Rather ironically that will see Dr Gonzi joining the ranks of the price sceptics.

Whenever the election takes place and whoever wins it, the euro will be a fact of life. Day by day it will be setting reality tests, which no amount of controversy and politicking can send away.

Victor Spiteri

I knew him not, but I admired Victor Spiteri through his frequent letters to various editors. He was very critical of aspects of the Labour Party, in a context that clearly recognised the need for a political cycle of alternation.

Yet his criticism did not stop at one party - he levelled his sharp lance at the whole political class.

The gentleman epitomised what a politically conscious and articulate citizen could do.

His family will feel his irreparable loss. In a different context, so will the Maltese media.