Central Bank gearing up for EMU
- timing of ERM II membership dependant on progress
While a number of countries including, recently, the UK have held wide-ranging
debates on the prospects of adopting Europe’s single currency, Malta
will not have the same option as European Union membership itself obliges
Malta to adopt the euro as its currency.
The impacts of the currency change have not yet been studied in great
detail, and while in the UK the Chancellor for the Exchequer put the
desirability or otherwise of adopting the Euro to ‘five tests’ to assist
in taking a decision, Malta will follow a different path.
The Central Bank is, however, planning for Malta’s adoption of the European
currency, Governor Michael Bonello said yesterday when speaking to The
Malta Financial and Business Times.
He explains, "The Central Bank is currently studying the situation
and will be consulting closely with the Ministry of Finance and Economic
Affairs with a view to drawing up an appropriate strategy to be pursued
in approaching Economic and Monetary Union (EMU) membership."
Asked whether Malta would be putting the euro to ‘tests’ as was done
recently in the UK, Bonello explained why such action was unnecessary:
"While relevant studies will of course be undertaken, no ‘five
tests’ analogous to the British ones are needed since the situation
of Malta is very different from that of the UK. First of all, Malta
already has a fixed exchange rate regime based on a currency basket
in which the euro has a weight of approximately 70 per cent.
"This in effect implies a monetary policy that is already largely
tied to that of the euro zone. There is, therefore, no question of Malta
having to give up a totally independent currency and an independent
monetary policy, as in the British case.
"Second, in the case of an economy as open as Malta’s, in which
imports were equivalent to almost 90 percent of GDP in 2002, the degree
of nominal convergence with its major trading partner, the EU, is already
quite high. This is, furthermore, reinforced by the Maltese lira’s link
to a currency basket dominated by the euro."
Like the other accession countries, Malta has no option but to join
the common European currency, a fact made clear to all applicant countries,
but exactly when Malta will join remains uncertain.
Bonello explained: "It should be noted first of all that only member
states that have achieved a degree of nominal and real economic convergence
considered both sufficient and sustainable are admitted to the EMU.
"One of the conditions to be met in this regard is participation
in the ERM II (the European Exchange Rate Mechanism) for a minimum period
of two years. Once Malta joins the EU in May next year, it will need
to decide when to begin participating in this mechanism.
"Upon membership exchange rate policy becomes a matter of common
interest, however, so that decision will be taken in consultation with
the other member states and the European Central Bank."
The Governor said the decision of when to join the ERM II: "will
certainly be conditioned by the progress registered in achieving the
convergence criteria, and particularly the deficit/GDP ratio.
"This is because successful participation in ERM II requires that
the authorities have sufficient room for manoeuvre to steer the economy
through the use of fiscal policy.
"The pace with which the fiscal imbalance and the public debt to
GDP ratio are reduced will thus have an important bearing on the timing
of Malta’s entry in the ERM II.
"As for the exchange rate, the generally stable level of external
reserves in recent years reflects an absence of significant upward or
downward pressures. Consequently, given the determination of the Government
to pursue prudent economic policies, I do not foresee any need for a