Euro adoption - ERM II experience and the challenges ahead
The Maltese lira participation in the European Exchange Rate Mechanism II, better known as ERM II, has been successful even though it posed a significant number of challenges. Certainly, the largest challenge was to defend Malta's external foreign...
The Maltese lira participation in the European Exchange Rate Mechanism II, better known as ERM II, has been successful even though it posed a significant number of challenges. Certainly, the largest challenge was to defend Malta's external foreign assets (better known as foreign reserves).
These external assets have been a very important anchor of economic stability and have guaranteed the fixed central parity rate between the Maltese lira and the euro.
With the removal of capital movement restrictions, the Central Bank of Malta could only use monetary policy to safeguard a healthy level of external reserves. Within the context of ERM II entry, both the Central Bank of Malta and the government applied a pro-active macroeconomic framework that has yielded the expected results.
Within this macroeconomic framework, the Central Bank of Malta applied a monetary policy that maintained the stability of the Maltese lira through the application of an interest rate differential between Maltese lira and euro-based assets. The Maltese-based assets have been enjoying a higher interest rate for the last few years.
Furthermore, the Central Bank continued to keep the inflation rate under check despite the price hike in the price of energy products while ensuring a recent healthy economic growth rate of 3.5 per cent in real terms.
On the fiscal front, the government continued with its fiscal consolidation exercise by increasing taxation revenue, decreasing expenditure on subventions to public enterprises, selling government assets and continuing to invest in the country's healthcare, social and educational system and general infrastructure. Furthermore, the application of other policies including enhanced wage flexibility, synchronisation of economic activity and boosting of financial sector supervision, among other things, also played an important part.
How successful the adoption of the euro will be in Malta depends on the ability of our macroeconomic policy to cope with macroeconomic risks and challenges ahead:
•Fiscal policy adjustment to the common currency environment:
•Labour cost increases must correspond to growth in productivity; and
•The "identification" of factors generating medium-term growth.
Inappropriate or insufficiently ambitious policy could result in an inflationary cycle, loss of competitiveness and eventually a stagnating economic activity. This is certainly not the case at present.
Finally, EU structural and cohesion funds for the period 2007 to 2013 must be oriented towards enhancing the GDP potential and should not stimulate government consumption (for example, if EU funded investment were to free budget resources).
• Mr Cassar Torreggiani is the executive head responsible for the euro changeover programme at Bank of Valletta.
These external assets have been a very important anchor of economic stability and have guaranteed the fixed central parity rate between the Maltese lira and the euro.
With the removal of capital movement restrictions, the Central Bank of Malta could only use monetary policy to safeguard a healthy level of external reserves. Within the context of ERM II entry, both the Central Bank of Malta and the government applied a pro-active macroeconomic framework that has yielded the expected results.
Within this macroeconomic framework, the Central Bank of Malta applied a monetary policy that maintained the stability of the Maltese lira through the application of an interest rate differential between Maltese lira and euro-based assets. The Maltese-based assets have been enjoying a higher interest rate for the last few years.
Furthermore, the Central Bank continued to keep the inflation rate under check despite the price hike in the price of energy products while ensuring a recent healthy economic growth rate of 3.5 per cent in real terms.
On the fiscal front, the government continued with its fiscal consolidation exercise by increasing taxation revenue, decreasing expenditure on subventions to public enterprises, selling government assets and continuing to invest in the country's healthcare, social and educational system and general infrastructure. Furthermore, the application of other policies including enhanced wage flexibility, synchronisation of economic activity and boosting of financial sector supervision, among other things, also played an important part.
How successful the adoption of the euro will be in Malta depends on the ability of our macroeconomic policy to cope with macroeconomic risks and challenges ahead:
•Fiscal policy adjustment to the common currency environment:
•Labour cost increases must correspond to growth in productivity; and
•The "identification" of factors generating medium-term growth.
Inappropriate or insufficiently ambitious policy could result in an inflationary cycle, loss of competitiveness and eventually a stagnating economic activity. This is certainly not the case at present.
Finally, EU structural and cohesion funds for the period 2007 to 2013 must be oriented towards enhancing the GDP potential and should not stimulate government consumption (for example, if EU funded investment were to free budget resources).
• Mr Cassar Torreggiani is the executive head responsible for the euro changeover programme at Bank of Valletta.