One year on, what has Malta's membership of the eurozone meant for the country?
It has meant a lot, much more than we expected in such a short space of time. There was a general consensus in the country that the euro was good for us and surveys consistently showed a very large majority were in favour of Malta adopting the euro. It has brought stability, which is something we perhaps took for granted. One year on, with the financial crisis around us, everyone agrees that, to use the Governor's words, "God forbid if we hadn't joined the euro". I just don't know how we would have handled such a crisis without significant costs to everyone in terms of the interest rates that would have had to be applied by the Central Bank to safeguard the reserves of the country.
In terms of business sentiment and Malta's investment attractiveness Malta's profile has increased significantly. When we talk to investors the euro is always one of the factors mentioned as attracting them to Malta. The fact that the country has implemented a steady convergence programme gives them more certainty, it places us more in the heart of Europe, and these factors clearly made us more attractive for investment.
What is it like to represent Malta at Ecofin?
There are two formats to Ecofin, the Economic and Financial Affairs Council composed of all the member states, and the euro group, composed of the member states whose currency is the euro, which discusses the eurozone. This latter group is more interactive because it is smaller and therefore there is quite a lot of cross debate and open discussion. I wouldn't say our arguments are not heard, both in Ecofin and the euro group. For example, I would make an intervention and then I'll hear the German Finance Minister making it public somewhere! My reaction would be: OK, a comment I made has been taken on board. Clearly, there are some issues which you feel the big countries tend to push especially when a big country like France has the presidency.
However, the Ecofin council is a very strong council for our country because most of the issues - mainly taxation - are pushed by a unanimous vote. So our country has a very strong vote. However, the big countries, Germany, France, UK, Italy, Spain, Poland, are not always on the same side of the fence. So they need other countries to support them and there is quite an interesting flavour within the council. Malta is not really considered to be aligned to a bloc. On some issues we are close to the UK, on other issues to Italy, or Germany or France. It really depends on the issue. That gives us quite a standing. We are not great talkers - I don't believe I should talk about everything. I hate it when I hear ministers talking about everything as though they are the experts on everything. You do feel, however, that when we make our intervention, due consideration is given.
How exactly did Malta's membership of the eurozone protect us from the global financial and economic crisis?
We clearly have the comfort of a strong currency. The Maltese lira served us well for 30 years but always at the back of the mind of every government and Central Bank Governor was the fact that this was a small currency, really insignificant in the world market, that its value and strength was not intrinsic but was based on what backed it, which was the country's reserves, and hence the importance of protecting those reserves.
Clearly to do so and to avoid a run on the currency, interest rates play an important role, and we used to pay a premium for interest rates compared to the euro, because our currency was perceived to be a higher risk, and it therefore justified a premium on interest rates. Interest rates went down when we joined the euro, but in such a crisis, as what happened in Denmark, Sweden and other countries that did not adopt the euro, to protect their currency they have had to significantly increase their interest rates, to counter the fact that because of the crisis people would invest in the krone or the krona or in our case the Maltese lira. This has been avoided and has brought us stability in this very difficult time.
What is the amount of Maltese liri still in circulation?
Not much really, we expected it to be slightly higher. Lm40.27 million has still not been converted to euro. Lm28.77 million are in notes and we expect those to come in as whoever hoarded cash knows that he has 10 more years to convert them. The coins, Lm11.5 million, have not yet been converted. With coins, this is a bit different. It is likely that most of that will not be converted because they would have been lost in the system, so to speak, such as by tourists taking them out of the country or being kept as collectors' items.
What is the amount of Maltese liri exchanged for euros so far?
In total Lm251.13 million (€584.98 million). Lm243.91 million (€568.16 million) in notes and Lm7.22 (€16.82 million) in coins.
Do you have an estimate of the amount of Maltese liri that were exchanged for goods such as property, cars, jewellery and yachts?
We have no real precise way of knowing what money went into items such as cars or property. In essence, I can't say that much money went into to the property market as there was a slight slowdown in the first four months of the year, mainly due to the general election where the property market tends to slow down - it picked up after the election but I can't really say there was a flow because of the euro. Actually, we saw quite a movement in October when the financial crisis erupted. People were liquidating their assets abroad and investing in property which is always deemed to be a safe investment in a crisis. Shares will go down in value, even property might go down in value but you still have the stone and you can get back its value in a few years. I can't say that people opted to spend their cash because they did not want to show it. The hoarding and voluntary schemes we had done encouraged a lot of people to return any hidden assets they had.
As more EU member states join the eurozone will this mean that Malta will lose a key competitive advantage over these countries?
Our early membership of the eurozone is clearly a plus for us in terms of foreign direct investment. On the other hand, an enlargement of the eurozone gives us more stability and more openness in the market particularly in our case, in the tourism sector. It is also better for our exports because we are exposed to less risk. At the moment we are suffering in tourism from the UK market because the UK is not in the euro. Those countries in the eurozone, including Malta, have become an expensive option for UK tourists wanting to travel for their holidays. So there is a plus for us if the UK had to join the euro.
As regards foreign direct investment the euro is one ingredient, it is not the only ingredient. Malta is considered a safe place to invest, our language skills which we really need to protect in this country through our educational system are a big plus for us. Our work ethic is something all investors talk about. Our fiscal structure is very attractive especially for international companies willing to invest in Malta so we have a lot of ingredients which make us attractive to investors. So, no, the growth of the eurozone is of benefit to us at the end of the day because it widens our opportunities for exports.
What has happened to the NECC? This was meant to be changed into an authority for consumer protection, yet we have heard nothing about this. Where have all the former NECC employees gone?
The employees have gone to their jobs, some in the private sector and others in the government. In reality I would like to clarify that even in our electoral manifesto we did not say the NECC will be the consumer authority. We said we will build on our experience at the NECC to reform present structures, to have a stronger competition authority, and also to have a stronger consumer agency as a counterweight, which won't be limited just to competition issues, but which will also conduct consumer campaigns like we did with the euro and by building trust like what was done with the Fair scheme.
Most of the NECC employees were on short term contracts so although in reality we wanted to use it as a base, the employees moved on. Many were given exposure and the private sector ran after them. So in a structure like the NECC when so many key people move on you'd have to start from scratch to rebuild such an organisation. However, I would like to thank all the former employees of NECC for doing a superb job. Everyone acknowledges what a smooth changeover we had and I think most people have forgotten that we joined the euro only a year ago. It feels like we have been in the eurozone for a long time.
How much investment did we attract into Malta thanks to the euro?
It's difficult to say but every time you ask an investor "Why Malta?" the euro is always mentioned among other reasons. Not having the euro could have been a minus in assessing where to move their business and could have led them to move elsewhere. Investors also mention Malta's investment incentives, fiscal structures, finding the right people, and then they always mention the euro.
Sterling is at an all time low and is almost at par with the euro. Are you concerned this will negatively affect tourism from the UK and what can we do to offset this problem?
We need to increase our marketing focus in the eurozone. We have to learn to do more business in the eurozone. Due to our traditional links to the UK, we always found it easier to conduct business with the UK, because of the language and other reasons. Europe, however, is much more than the UK. Some time ago the UK was responsible for 65 per cent of our tourism market - today it is 45 per cent. We need to have more Germans visiting us, for example. Obviously we cannot abandon the UK market because it is an important component. It's ok if the UK market goes down to 30 per cent as long as we get increased figures from other sources and that is what we are trying to do.
At the end of the day that would mean we would be getting the mix which is so vital for our economy. The greatest advantage of our economy has always been its diversity. Look at the manufacturing sector. In this crisis the auto industry and the semi-conductor industry has suffered but other sectors, such as the pharmaceutical sector, have not. That means the mix is working. When there is a crisis you can feel the pressure on one end but you can feel the growth areas in another end.
In your meetings with UK ministers do you ever get a hint that the UK might be considering joining the eurozone?
Due to the financial crisis there has been a debate in some circles in the UK about it joining the euro. In my opinion - I would not say I am an expert on the UK economy - the economic fundamentals don't really justify having the pound over the euro. I think it is more an issue of sovereignty rather than economics which is at stake and therefore one has to appreciate the political environment that such a decision would have to be taken within. It's a sensitive issue and I think the international crisis is making Britain ask the basic question. The test will come on the basis of how long the crisis will last, how the UK will come out of it and how the UK will use the pound to support the recovery.
Do you think consumers and businesspeople have warmed to the euro? Do you feel people still think in liri and need to put a value on products and services priced in euros?
I think many people have now switched to the euro. Perhaps when large transactions are concerned they switch to the lira because in reality it a measurement yardstick and it will take time for people to change. I was recently shopping and a lady customer told the grocer "With euros it's as if you are buying nothing, not like with the lira". In reality €5 is not Lm5, its Lm2.15 so one can understand this sort of feeling. However I think people have got used to the euro and shops are no longer obliged to have dual display prices. Some shops have opted to do so, and in a way this helps keep inflation under control.
The annual rate of inflation was 4.13 per cent in September, 5.42 per cent in October and 4.82 per cent in November. These are worrying figures. How much do you think the changeover to the euro is responsible for this?
Nothing really. Our studies have shown that in the first three months of the year inflation was in fact very low and perceived inflation was very low. People did not perceive that the euro increased prices. I think everybody realised that the price increases were internationally driven caused by an increase in the price of food and oil. The increases we are experiencing now are related to energy costs which we will now start seeing to subside because on the international market oil is on the downturn and so are other commodities. So our expectation now is to see a significant decline in the inflation rate over the coming 12 months and as long as the world economy doesn't pick up that should be sustained for some time.
It has meant a lot, much more than we expected in such a short space of time. There was a general consensus in the country that the euro was good for us and surveys consistently showed a very large majority were in favour of Malta adopting the euro. It has brought stability, which is something we perhaps took for granted. One year on, with the financial crisis around us, everyone agrees that, to use the Governor's words, "God forbid if we hadn't joined the euro". I just don't know how we would have handled such a crisis without significant costs to everyone in terms of the interest rates that would have had to be applied by the Central Bank to safeguard the reserves of the country.
In terms of business sentiment and Malta's investment attractiveness Malta's profile has increased significantly. When we talk to investors the euro is always one of the factors mentioned as attracting them to Malta. The fact that the country has implemented a steady convergence programme gives them more certainty, it places us more in the heart of Europe, and these factors clearly made us more attractive for investment.
What is it like to represent Malta at Ecofin?
There are two formats to Ecofin, the Economic and Financial Affairs Council composed of all the member states, and the euro group, composed of the member states whose currency is the euro, which discusses the eurozone. This latter group is more interactive because it is smaller and therefore there is quite a lot of cross debate and open discussion. I wouldn't say our arguments are not heard, both in Ecofin and the euro group. For example, I would make an intervention and then I'll hear the German Finance Minister making it public somewhere! My reaction would be: OK, a comment I made has been taken on board. Clearly, there are some issues which you feel the big countries tend to push especially when a big country like France has the presidency.
However, the Ecofin council is a very strong council for our country because most of the issues - mainly taxation - are pushed by a unanimous vote. So our country has a very strong vote. However, the big countries, Germany, France, UK, Italy, Spain, Poland, are not always on the same side of the fence. So they need other countries to support them and there is quite an interesting flavour within the council. Malta is not really considered to be aligned to a bloc. On some issues we are close to the UK, on other issues to Italy, or Germany or France. It really depends on the issue. That gives us quite a standing. We are not great talkers - I don't believe I should talk about everything. I hate it when I hear ministers talking about everything as though they are the experts on everything. You do feel, however, that when we make our intervention, due consideration is given.
How exactly did Malta's membership of the eurozone protect us from the global financial and economic crisis?
We clearly have the comfort of a strong currency. The Maltese lira served us well for 30 years but always at the back of the mind of every government and Central Bank Governor was the fact that this was a small currency, really insignificant in the world market, that its value and strength was not intrinsic but was based on what backed it, which was the country's reserves, and hence the importance of protecting those reserves.
Clearly to do so and to avoid a run on the currency, interest rates play an important role, and we used to pay a premium for interest rates compared to the euro, because our currency was perceived to be a higher risk, and it therefore justified a premium on interest rates. Interest rates went down when we joined the euro, but in such a crisis, as what happened in Denmark, Sweden and other countries that did not adopt the euro, to protect their currency they have had to significantly increase their interest rates, to counter the fact that because of the crisis people would invest in the krone or the krona or in our case the Maltese lira. This has been avoided and has brought us stability in this very difficult time.
What is the amount of Maltese liri still in circulation?
Not much really, we expected it to be slightly higher. Lm40.27 million has still not been converted to euro. Lm28.77 million are in notes and we expect those to come in as whoever hoarded cash knows that he has 10 more years to convert them. The coins, Lm11.5 million, have not yet been converted. With coins, this is a bit different. It is likely that most of that will not be converted because they would have been lost in the system, so to speak, such as by tourists taking them out of the country or being kept as collectors' items.
What is the amount of Maltese liri exchanged for euros so far?
In total Lm251.13 million (€584.98 million). Lm243.91 million (€568.16 million) in notes and Lm7.22 (€16.82 million) in coins.
Do you have an estimate of the amount of Maltese liri that were exchanged for goods such as property, cars, jewellery and yachts?
We have no real precise way of knowing what money went into items such as cars or property. In essence, I can't say that much money went into to the property market as there was a slight slowdown in the first four months of the year, mainly due to the general election where the property market tends to slow down - it picked up after the election but I can't really say there was a flow because of the euro. Actually, we saw quite a movement in October when the financial crisis erupted. People were liquidating their assets abroad and investing in property which is always deemed to be a safe investment in a crisis. Shares will go down in value, even property might go down in value but you still have the stone and you can get back its value in a few years. I can't say that people opted to spend their cash because they did not want to show it. The hoarding and voluntary schemes we had done encouraged a lot of people to return any hidden assets they had.
As more EU member states join the eurozone will this mean that Malta will lose a key competitive advantage over these countries?
Our early membership of the eurozone is clearly a plus for us in terms of foreign direct investment. On the other hand, an enlargement of the eurozone gives us more stability and more openness in the market particularly in our case, in the tourism sector. It is also better for our exports because we are exposed to less risk. At the moment we are suffering in tourism from the UK market because the UK is not in the euro. Those countries in the eurozone, including Malta, have become an expensive option for UK tourists wanting to travel for their holidays. So there is a plus for us if the UK had to join the euro.
As regards foreign direct investment the euro is one ingredient, it is not the only ingredient. Malta is considered a safe place to invest, our language skills which we really need to protect in this country through our educational system are a big plus for us. Our work ethic is something all investors talk about. Our fiscal structure is very attractive especially for international companies willing to invest in Malta so we have a lot of ingredients which make us attractive to investors. So, no, the growth of the eurozone is of benefit to us at the end of the day because it widens our opportunities for exports.
What has happened to the NECC? This was meant to be changed into an authority for consumer protection, yet we have heard nothing about this. Where have all the former NECC employees gone?
The employees have gone to their jobs, some in the private sector and others in the government. In reality I would like to clarify that even in our electoral manifesto we did not say the NECC will be the consumer authority. We said we will build on our experience at the NECC to reform present structures, to have a stronger competition authority, and also to have a stronger consumer agency as a counterweight, which won't be limited just to competition issues, but which will also conduct consumer campaigns like we did with the euro and by building trust like what was done with the Fair scheme.
Most of the NECC employees were on short term contracts so although in reality we wanted to use it as a base, the employees moved on. Many were given exposure and the private sector ran after them. So in a structure like the NECC when so many key people move on you'd have to start from scratch to rebuild such an organisation. However, I would like to thank all the former employees of NECC for doing a superb job. Everyone acknowledges what a smooth changeover we had and I think most people have forgotten that we joined the euro only a year ago. It feels like we have been in the eurozone for a long time.
How much investment did we attract into Malta thanks to the euro?
It's difficult to say but every time you ask an investor "Why Malta?" the euro is always mentioned among other reasons. Not having the euro could have been a minus in assessing where to move their business and could have led them to move elsewhere. Investors also mention Malta's investment incentives, fiscal structures, finding the right people, and then they always mention the euro.
Sterling is at an all time low and is almost at par with the euro. Are you concerned this will negatively affect tourism from the UK and what can we do to offset this problem?
We need to increase our marketing focus in the eurozone. We have to learn to do more business in the eurozone. Due to our traditional links to the UK, we always found it easier to conduct business with the UK, because of the language and other reasons. Europe, however, is much more than the UK. Some time ago the UK was responsible for 65 per cent of our tourism market - today it is 45 per cent. We need to have more Germans visiting us, for example. Obviously we cannot abandon the UK market because it is an important component. It's ok if the UK market goes down to 30 per cent as long as we get increased figures from other sources and that is what we are trying to do.
At the end of the day that would mean we would be getting the mix which is so vital for our economy. The greatest advantage of our economy has always been its diversity. Look at the manufacturing sector. In this crisis the auto industry and the semi-conductor industry has suffered but other sectors, such as the pharmaceutical sector, have not. That means the mix is working. When there is a crisis you can feel the pressure on one end but you can feel the growth areas in another end.
In your meetings with UK ministers do you ever get a hint that the UK might be considering joining the eurozone?
Due to the financial crisis there has been a debate in some circles in the UK about it joining the euro. In my opinion - I would not say I am an expert on the UK economy - the economic fundamentals don't really justify having the pound over the euro. I think it is more an issue of sovereignty rather than economics which is at stake and therefore one has to appreciate the political environment that such a decision would have to be taken within. It's a sensitive issue and I think the international crisis is making Britain ask the basic question. The test will come on the basis of how long the crisis will last, how the UK will come out of it and how the UK will use the pound to support the recovery.
Do you think consumers and businesspeople have warmed to the euro? Do you feel people still think in liri and need to put a value on products and services priced in euros?
I think many people have now switched to the euro. Perhaps when large transactions are concerned they switch to the lira because in reality it a measurement yardstick and it will take time for people to change. I was recently shopping and a lady customer told the grocer "With euros it's as if you are buying nothing, not like with the lira". In reality €5 is not Lm5, its Lm2.15 so one can understand this sort of feeling. However I think people have got used to the euro and shops are no longer obliged to have dual display prices. Some shops have opted to do so, and in a way this helps keep inflation under control.
The annual rate of inflation was 4.13 per cent in September, 5.42 per cent in October and 4.82 per cent in November. These are worrying figures. How much do you think the changeover to the euro is responsible for this?
Nothing really. Our studies have shown that in the first three months of the year inflation was in fact very low and perceived inflation was very low. People did not perceive that the euro increased prices. I think everybody realised that the price increases were internationally driven caused by an increase in the price of food and oil. The increases we are experiencing now are related to energy costs which we will now start seeing to subside because on the international market oil is on the downturn and so are other commodities. So our expectation now is to see a significant decline in the inflation rate over the coming 12 months and as long as the world economy doesn't pick up that should be sustained for some time.