George M. Mangion
Single currency challenges

By 2010, a Single Euro Payment Area will be created which could include non-EU countries such as Switzerland and those in the European Economic Area

For the first time since the fall of the Roman Empire most of Europe has a single, common currency. The US dollar faces its toughest challenge to its hegemony since it displaced the British pound sterling as the world’s most important currency after the First World War. The euro goes from strength to strength.
By 2010, a Single Euro Payment Area will be created which could include non-EU countries such as Switzerland and those in the European Economic Area. This is expected to reduce costs as cash transactions are very costly to administer. However, if the Euro is to assume a wider role it will have to flourish in its own continent and survive challenges to the stability of European economies first.
On the other hand the European stock market landscape is still distinctly fragmented with a large number of market models, trading and settlement systems, albeit the cooperation and merger activities which have been initiated. So what are the pitfalls (if any) for our tiny economy once we join the euro.
A study on the impact on the tourism sector revealed that a total of 40 per cent of visitors come from the eurozone and a further 38 per cent from the UK. Last year the MHRA estimated that joining the euro would improve competitiveness by 0.7 per cent, more than twice that if the UK joins the eurozone. On average MHRA predicts that revenue would increase by 1.3 per cent (2.6 per cent with the UK).
Equally so the benefit for the financial services sector will be positive. The impact of the euro on foreign direct investment, the financial services industry and payments across Europe towards inwards direct investment will be enhanced. The primary period of potential risk is the eight -month window up to 1st January 2008 during which the national currencies in paper and coin form will be exchanged for the euro. Some experts expressed the fear that money launderers might use this window to try to introduce illegally derived funds or untaxed monies by hiding them among the expected higher volume of operations involving ‘exchanges’ of national currency for the euro.
Other experts believed that there might be a rise in laundering in the time before the changeover — by using traditional methods, by exchanging these funds for currency from outside the euro zone, or by increased use of professional services providers — all to avoid detection during the actual changeover period.
Last week saw the announcement of a tax amnesty on undeclared funds . This amnesty charges 4% on cash and 6% on bank accounts exceeding Lm5,000 which will be given the green light on a no-questions asked once the levy is paid. Hopefully this will regularise the massive hoard of cash in circulation which the Central Bank calculates reaches beyond Lm250 million.
Typically government may net a cool Lm10 million on such funds and pave the way for an orderly conversion into the euro of the larger quantities of Lm20 notes hoarded under the proverbial mattress. Moralists complain that since government has been trigger happy to issue tax amnesties to tax evaders this penalises law-abiding citizens. Actually this is the fourth amnesty in the past five years. We are behaving very much like our Italian neighbours in the north.
Many critics agree that the action plan adopted by the European Council to implement the internal market for financial services will further benefit smaller states such as Malta. Naturally, the future development of the international role of the euro will depend on how fast will the three main laggards progress that is Italy, France and Germany.
Conversely the Exchange Rate Mechanism II has resulted in being a “soft” exchange-rate pegging to the euro as it obliged the accession countries to maintain the normal range of plus/minus 15 percent for at least two years before the convergence examination, without making one-sided leading interest-rate adjustments.
To that extent, accession countries such as Malta , Slovenia and Cyprus participating in the Exchange Rate Mechanism II did not find it difficult to maintain the target range of plus/minus 15 per cent, which at first glance appears to be generous, as luckily they did not experience shocks specific to their own country.
Typically countries such as Malta with a relative higher inflation figure in the mid 2000 saw it making greater sacrifices to rein in imported or even self –induced inflation. The hiking by 20% in the vat rate four years ago ostensibly to finance the higher cost of health care has slowly percolated into the pricing mechanism and edged inflation upwards. Does this mean that Malta will fail the test of inflation and the reigning in of its structural deficits?
According to debt data for 2003 Eurostat showed Malta saw a worsening of its annual deficit. But we were not alone in the red. The largest government deficits relative to GDP were recorded in 2003 by the Czech Republic (-12.6 per cent), Malta (-9.7 per cent) and Cyprus (-6.4 per cent). Malta’s deficit was the second highest in the Union in 2003.
Does the millstone round our necks such as the accumulated national debt ever be paid off in the next decade unless we exceed the annual rate of below 4% growth. Not likely. Economists contend that the weaker the structural departure point of a country, the greater the danger that it will slip into real divergence. This means that the living standards between the rich core countries and the poorer accession countries would continue to drift apart. The average gross domestic product per capita for Malta , which is measured in terms of purchasing power, is regrettably only at one-halve of the level of the European Union.
At the current rate of growth it will take us at least 25 years to catch up. On the other hand, a slide into real divergence would give rise to political counter-reactions as demands for wage adjustments and the rising spiral of health care will exacerbate tensions among the social partners. The core countries of the European Union cannot afford to let the discrepancy fester between themselves.
Typically some of “club members” continue to increase in affluence while countries such as Portugal slides into a poorer region. Collectively this is not welcome for the Union as this would adversely affect its own internal trade and endanger the stability of the European integration process. Consumers in Malta are naturally interested to see what sort of impact may arise from simply switching from our currency to euro. They will also want to know whether reports of widespread price rises during the changeover in some eurozone countries are true. Another cliché is that actually joining the euro locks its options since once a country is in, it has no ability to run a monetary policy tailored to its specific needs.
Survey and anecdotal evidence collected by consumer organisations in the first wave countries however suggests that there have been some significant increases in prices, particularly for personal and leisure services.
This was manifested in Ireland even though official EU sources contend that the euro changeover did not show up sectoral problems or individual abuses in price rigging. In Germany it is a fact that the gastronomy sector and an array of service industries have done rather well for themselves since the euro introduction and this phenomena has had a negative impact on people’s mood.
Nobody can foretell if the euro changeover project succeeds in stabilising prices in Malta next year. Party apologists point out that inflation has been under wraps this year falling below 2.2% whereas the GDP growth may reach 3.4% next year. But will this be one swallow in a summer?
Are we doing enough to reclaim the lost momentum on the lack of competitiveness on export markets? It is an election year and we are braced to hear so many promises from the main parties in the race.