This week the euro plunged to its lowest levels since 2003, dropping to $1.1315. The all-time high was recorded in July 2008, when it traded at $1.6038. Photo: Reuters

The ailing euro, which has hit an 11-year low against the dollar, could be a blessing in disguise for Maltese exports to non-eurozone countries and tourism from the UK, according to Central Bank Governor Josef Bonnici.

His views were also shared by other financial experts when asked by The Sunday Times of Malta to analyse the impact which this downward trend could have on the Maltese economy.

“The depreciation of the euro makes Maltese exports more competitive, leading to higher exports, including spending by tourists arriving from outside the euro area,” Prof. Bonnici said.

The downside is that the cost of imports from non-eurozone countries would rise, but only up to a certain degree, according to the Central Bank chief.

The current scenario could also spell bad news for Maltese travellers to non-eurozone destinations such as the UK, Switzerland and the US, as this depreciation would increase the price of a holiday there.

“Overall, one would expect a positive effect on the Gross Domestic Product. However, a concurrent increase in costs that is not accompanied by gains in productivity would offset the rise in competitiveness,” Prof. Bonnici warned.

On Thursday the European Central Bank launched an unprecedented bond-buying exercise aimed at reversing deflation and boosting the eurozone economy, in what is technically referred to as quantitative easing.

The weakening of the euro is a mixed blessing for Malta

While confirming that markets had generally responded positively to this announcement, the Central Bank Governor remarked that national governments needed to complement this programme by further structural reforms and fiscal policies.

Economist Gordon Cordina said the current scenario presented opportunities for Malta to increase exports to non-eurozone countries, including the UK. However, he warned that Malta could not afford to allow domestic costs to soar.

While acknowledging that these benefits could be offset by a rise in the cost of imports from non-eurozone countries, he said the fall in oil prices made such a possibility unlikely. As for the reasons behind the plummeting value of the euro, he said this was a sign of an ailing EU economy and symptomatic of the uncertainty over Greece’s future in the eurozone.

Economist Lino Briguglio said a victory for the left-wing Syriza party in today’s election in Greece could possibly precipitate a Greek exit from the eurozone, which would further affect the exchange rate.

While noting that the depreciation would not affect transactions with other euro area countries such as Germany, Italy, France and Spain, it would make Maltese exports to non-EU area members such as the UK, the US and Asia cheaper. This would also apply to tourism, which is considered an export.

On the other hand, the rise in the cost of imports could push the cost of living upwards while also affecting the cost of industrial supplies.

As a result Prof. Briguglio’s overall assessment is that the weakening of the euro is a “mixed blessing for Malta”.

Financial adviser Jesmond Mizzi said the quantitative easing programme could keep the euro at low levels for some time.

He said that if this programme managed to rescue Europe’s economy, Malta would profit due to more wealth being generated from the increase in exports bound for eurozone countries and tourism.

On the other hand, a weaker euro would open opportunities to non-euro-currency countries.

“European companies including the Maltese should perform better as exports and internal consumption increase while cheaper corporate lending may encourage companies to invest more,” he said

However, he mentioned that this impact could be limited as European businesses tend towards bank borrowing, rather than borrowing from financial markets.

“Though businesses in Malta tend to borrow from banks, the fact that last year a good number of companies issued bonds could be a positive both for companies and investors alike,” he said.

Nevertheless, he cautioned against relying on quantitative easing to do the job, saying that politicians in Europe should do their part by implementing structural reforms.