It appears that the issue of Malta's membership of the euro is quickly attracting interest in this country. It may be very tempting to seek to confine the debate to those who are in the know - namely economists, bankers, accountants, investment advisers, stockbrokers, politicians - as we are talking about the adoption of a new currency instead of the Malta lira.
Even in countries that are much bigger than ours, the decision has not been easy, even though they had more options than us. We do not have the option of not adopting the euro, we have to decide when to adopt the euro and what strategy we are going to use in the adoption process.
There have been countries like the United Kingdom that had decided not to adopt the euro and it is still very uncertain whether the UK shall be adopting the euro or not. There are countries that have adopted the euro and have not regretted it; while there are others, like Italy, which did adopt the euro but are now questioning whether it was too early or whether the strategy used in the adoption process was the correct one.
This certainly gives the indication that, irrespective of what decision is taken by Malta on the date of the adoption of the euro, it shall not be an easy one.
There are the costs and there are the benefits. Moreover, Malta does not live in a vacuum. The economy is one of the most open in the world, even though our currency is not traded internationally.
Decisions taken beyond our shores by major companies across all economic sectors and international institutions affect us in no small way. We just need to think of the price of oil, the decisions by the Federal Reserve of the United States and the European Central Bank to change interest rates, decisions taken by multinational companies whether to invest in Malta or not, decisions by large tour operators whether to promote Malta or not, are all examples of how true this is.
The impact should not be viewed solely from the perspective of the business sector, but also from other perspectives, as society as a whole is going to be affected by the adoption of the euro. The impact on the business sector is also not likely to be uniform across the board. The nature of the business, the market orientation, the size of the company are all factors that are likely to determine the nature of the impact of the adoption of the euro.
There are issues related to employment, issues related to inflation and cost of living, issues related to price competitiveness of firms operating in Malta and issues related to the fiscal deficit, among others that need to be considered.
Adopting the euro would force us to adhere to the EU rules on fiscal deficits. It could serve as an added impetus to implement the reforms that have long been coming. Adopting the euro would avoid any attempt at speculation with the Malta lira as has happened ever since talk of devaluation of our currency had started. Adopting the euro would mean that the Maltese public would be making use of an internationally recognised currency. Adopting the euro would eliminate most of the currency risks inherent in international trade.
It could also release a substantial part of the foreign reserves held by the Central Bank. Moreover, the current credit rating of the country would be more sustainable.
On the other hand, the adoption of the euro with the subsequent currency change could cause an element of inflation as has happened in other countries. There is also the risk of adopting the euro at a rate that is uncompetitive for our business sector.
These are all critical issues that cannot be ignored, but neither can they be brushed aside through comments that are only meant to score brownie points by one institution against another, or a political party against another. The adoption of the euro could well represent the key issue at the next general election three years from now.
This is an acceptable situation, so long as the debate is not confined exclusively to the realms of politics. The decision to join the EU was both a political and an economic decision. However, the decision to adopt the euro is essentially an economic decision.
The decision to adopt the euro needs to be preceded by another one, namely joining ERM II (the Exchange Rate Mechanism). ERM II would set the value of the Malta lira against the euro with the possibility of a fluctuation band of +/- 15 per cent.
The Central Bank of Malta is expected to take an active role to support the value of the Malta lira. If the value of the Malta lira were to be close to the margin of the fluctuating band, then the European Central Bank and the national central banks of the euro area are expected to intervene to safeguard the value of the Malta lira. It should be noted that Malta has the possibility to agree to have a narrower band than this.
In an earlier contribution to this newspaper I had expressed my belief that Malta should adopt the euro sooner rather than later. I am still of that opinion because I consider the benefits to be greater than the costs. Delaying the adoption of the euro could make the value of the Malta lira unsustainable. However, we should make sure that we do not falter on the implementation strategy. The debate on the adoption of the euro should also focus on this issue.