Managing our currency blues

The strength of the euro and weakness of sterling and the US dollar have profound implications for the Maltese economy which now forms part of the eurozone. There are of course upside consequences of the currency realities we are facing today.

For instance, people planning to spend their holidays in the UK this year are bound to get more sterling for their euros, even if inflation in the UK will erode most of this benefit. Similarly, the spiralling cost of oil will have a less serious impact on our energy bill when it is converted to euros.

But even this could prove to be an illusion because most financial and commodity experts assert that there is a close link between the fall in the US dollar and the increase in the price of oil. I have recently heard a financial expert working for UBS saying that the current price of oil has an in-built premium of about $25 per barrel because of the weakness of the dollar.

However, what is really of concern to us Maltese is the effect a strong euro and a weak sterling is having on our industries. It is of little consolation that business leaders in the eurozone economies are increasingly showing concern about the downside effects of a strong euro.

Louis Gallois, the CEO of Airbus, recently delivered a warning to the European Central Bank that the strength of the euro could lead to an exodus of European export industries. This exodus has in fact already started in some countries.

For instance, service and manufacturing industries in Ireland are slowly but surely moving out of this eurozone country to relocate in countries where costs are not only lower, but also incurred in a weaker currency, like sterling. Northern Ireland is already befitting from this phenomenon.

Our business leaders in Malta have only one way of countering this potentially dangerous phenomenon. Now that our Central Bank no longer has any real authority in managing our currency exchange, and much less our monetary policy, our industries can only thrive if we improve our productivity and competitiveness.

One still has to see what the effect of the weak sterling will have on our tourism industry this year. The British market remains one of our strongest and with the exchange rate of sterling being at its lowest ever with the euro, British tourists will no doubt consider spending their holidays for instance in the US, Tunisia, and the Balkan states whose softer currencies offer better value for money.

Our manufacturing industry faces a similar challenge. Companies in the pharmaceutical and IT sectors, in particular, have to compete with other companies whose costs are paid for in weaker currencies, usually pegged to the US dollar, and this no doubt places our companies at a distinct disadvantage.

The future of thousands of jobs in manufacturing, tourism and other services industries will be highly dependent on our ability to boost productivity and our competitiveness to compensate for the disadvantage of selling our goods and services in a strong euro. The inflation prospects in the eurozone will no doubt complicate matters.

We owe it to our employees and their families to ensure that the restructuring of our industries continues and that it achieves the desired results in improving productivity. Improved productivity depends on several factors.

In the meantime we expect the Government and our business leaders to tell us about their plans on how they will manage our currency blues.

Dr Mangion is the MLP's finance spokesman.