Malta entering 'exciting' phase of economic history

The next phase in Malta's economic history, heralded by the introduction of the euro, promises to be a challenging and exciting time, Central Bank of Malta Governor Michael C. Bonello said at the conference.

For a country with a population of 400,000 and a GDP of just €4.5 billion (Lm1.93 billion) having the euro as its currency was indeed a significant advantage, he said.

"We thus have good reason to feel encouraged as while the EU has, for 50 years, brought peace and stability to the peoples of Europe, the single market and Economic and Monetary Union have created a congenial environment in which economies can grow and people prosper."

Mr Bonello said the Central Bank of Malta had been making the case for early adoption of the euro since the Maltese lira entered the Exchange Rate Mechanism II in 2005 because the economy was clearly well suited to participate in the Economic and Monetary Union. Malta had a long history of market economy, it was already well integrated in the euro area through trade and finance and had close similarities with the euro area in many fields. Malta also had a relatively high level of development with a GDP per capita close to the euro average.

"The Maltese people have used many different currencies in circumstances often dictated by the changing balance of power in the Mediterranean and reflecting Malta's dependency on larger and more powerful nations. The adoption of the euro, however, is a change of currency with a difference because it will occur because Malta, out of its own choice, will join 14 other sovereign member states of the EU in an economic and monetary union designed to complement the Single European Market, a venture that could rightly be described as an epoch-making development in the history of our continent."

Reaching this milestone had by no means been an easy task. Difficult decisions were called for, and taken, to start addressing existing imbalances and other impediments to growth in order to satisfy the Maastricht criteria.

"As for the logistics involved in preparing for the change of currency, a wide-ranging effort has been undertaken during the past two years to mobilise both the public and private sectors and to coordinate preparations at a national level."

Acknowledging the valuable work carried out by the National Euro Changeover Committee and its Steering Committee, Mr Bonello paid tribute to the staff of the Central Bank of Malta for their contribution in preparing the Bank for its role as a member of the Eurosystem and in planning and executing the currency changeover.

Speaking about some of the advantages of the euro, Mr Bonello said it offered the prospect of enhancing the economy's potential to grow faster.

"The elimination of exchange rate risk and currency conversion costs should result in increased trade, while the low interest rate and inflation environment of the euro area should make for reduced business costs and greater macroeconomic stability. Combined with the fiscal discipline associated with monetary union, this is expected to translate into higher credit ratings and improved investment prospects.

"From a central banker's perspective, moreover, a key benefit of euro area membership will be the elimination of the risks inherent in managing a small, vulnerable currency and their replacement by the greater security afforded by the world's second most important currency."

Moreover, participation in EMU was desirable for another reason: "We were aware that we would thus become part of a framework that has been successful in fostering economic growth and employment creation.

"Put simply, the task that Malta faces is to bridge the remaining income gap with the more advanced members of the euro area. Looking beyond the introduction of the euro, therefore, the task is to maximise the benefits of participation in monetary union by making further progress on the path of reform.

"The success of this endeavour will depend on how effectively the public and private sectors work together, both in assimilating the lessons learned during these first years of EU membership and in implementing appropriate policies. And since in a resource-poor and open economy like Malta's, growth must be predominantly export-led, the focus of policy must be on increasing the country's international competitiveness," Mr Bonello said.