OPINON - Goerge M. Mangion | Wednesday, 09 January 2008

Making a euro cross

The new year gave birth to a new form of cynicism precisely that of combating the euro hype.
NECC reminds us that euro is extremely important to us.
Its leaflets assure us of the net benefits that we are going to reap which in the long term are positive and substantial. Typically we are going to increase our exports and, that business will move faster and better than under the lira regime.
They remind us how the economy has progressed to achieve euro convergence. Others such as Slovakia still hope to fulfill the three-per-cent budget deficit requirement, at 40 per cent, the nation’s debt is already well within the 60 per cent target.
By comparison it is unlikely that Poland and the Czech Republic will adopt the common currency before 2012 with Hungary possibly two years later.
Back to Malta, realists who remember the conversion to decimal currency warn us that there will be problems during a transitional period but pointed out that progress comes with reform.
During a short period, lira notes and Maltese coins will circulate alongside euro notes and coins. This transition is necessary since sufficient time is needed to withdraw lira notes and coins from circulation.
But cynics like me tend to stand back and reflect on the finer elements of life like the endless “Victory kitchen” queues at banks by common folk and retailers waiting their turn in the cold weather. Last week hundreds scrambled to obtain euro from commercial banks, with long queues of people wanting to secure coins and banknotes before they start using them. Shops, businesses and banks have been displaying their prices in lira and euro for the past six months to help consumers get used to the new scale of values while the Ministry of Finance have secured agreement with suppliers to freeze prices for three months.
Retailers, shop owners and “Monti” hawkers had mixed comments on the first days.
Most argued that business was slower since hawkers did not have much change and the queues at the bank to exchange liri are too long. Disappointment at the long queues forced some retailers to suggest that NECC should have let shoppers change their money a month ago to be well stocked. This is apart from the fact that hoards of Lm20 notes have not been deposited in banks prior to e-day and are surfacing now. Bank of Valletta rebuts the argument by stating that its branch network, distributed over 15,000 retail starter kits and about 100,000 personal mini-kits prior to E-day. This bank estimates that in all when all cash in circulation is collected there will be over 450 tons of coins and over 35 million bank notes .
It goes without saying that the gamble of the euro conversion executed under the shadow of a general election compounds the stress factor.
It may be one of the reasons why money in circulation has shied away from seeking shelter in banks.
Central Bank announced that over Lm200 million is still in circulation partly concealed in Lm20 notes under mattresses or in safes.
This was after the second extension of a generous tax amnesty for hoarders of cash undeclared for tax purposes. But life goes on and voters are conscious that in view of the Spring election both major political parties are pledging generous initiatives and may close one eye on undeclared hoards. Santa in its Budget for 2008 announced generous tax cuts and other benefits, while the opposition party is promising “to slash tax on overtime work, grant workers pay for public holidays that fall on weekends, and boost heavy industry, especially at Malta’s ports, while pushing the growth rate up to as much as 6%.
So far our best estimate for 2007 will not exceed 4% GDP growth and is expected to slow down this year due to higher oil and cereal prices.
This will further strain our competitiveness even though there will be positive purchasing power gains from using a stong euro currency vis-a-vis the dollar. Exporters may well heed John Dalli’s warning about the alleged high parity rate of the lira. Then,as finance minister,now personal advisor to PM; Dalli had in 1994 been the architect of the assertive 10% devaluation which removed any skewness within the sterling content.
Fact is that we made it and together with Cyprus we have adopted the euro in January.
The Cyprus pound currently trades at around 1.73 euros which compares with 2.32 euros of the stronger lira. The exchange rate of the Cyprus pound to the euro has been set at 0.585274 as compared with the stronger lira set at 0.429300.
Cyprus reduced its deficit to a manageable 1.5 percent of GDP by the end of 2007, whereas unemployment remains at around 5.5 percent, much lower than the EU 27 average of 8.2 percent. Problems such as shortage of free euro converters and ill-prepared shops were reported in Cypriot media. Long queues at banks were also witnessed in the capital city Nicosia. Some 430 parking meters in Nicosia also encountered problems and had to be covered up. Luckily for us we witnessed less problems with converters although some vending machines in schools were not working. Yet, the lingering doubt still persists on the correctness of our exchange rate.
Now an unpublished IMF report (July 2006 ) was quoted on MaltaStar as saying the Commission wrote: “The IMF report… repeatedly suggests that the current exchange rate of the Maltese lira is significantly overvalued and is the source of Malta’s competitiveness problems.
The IMF staff evaluation of July last year was rather less than complimentary regarding Maltese economic performance.
It appears that we are have not always acted smart with hindsight.
According to the Central Bank of Malta, between 2002 and 2006, overvaluation of the lira grew overall from zero in 2002 to some 9 percent in 2006. Yet notwithstanding this alleged over-valuation inflation for imported items have been higher than in the rest of the eurozone. You would have expected a lowering in the cost of living index.
Paradoxically, on its merits this seems to contradict the claim that the lira has been set at an overvalued rate.
So let us see how others have fared so far since joining the eurozone .
Typically one compares the experiences of Euro adoption in Greece, 2001, and Slovenia, a year ago. Both registered economic progress, but not without “harmful side-effects”. On a positive note their experiences show that a monetary policy set by the European Central Bank can be a mixed blessing for small, fast-growing economy such as Slovenia .
Slovenia is a country of 2 million which enjoys a clean and prosperous tourism and looks more like Switzerland than communist ex-Yugoslavia, which it quit in 1991 after a brief war with the Serb-dominated federal army.
Nevertheless, its government admits that prices could rise as a result of the euro’s introduction - a recent survey highlighted that around 40% of Slovenians are concerned about inflation. Shoppers find prices are going up every day. Housewives retort that it’s the worst with small items. Cost of living hiked as inflation jumped to 5.7 percent. Quoting political analyst Meta Roglic at Dnevnik, one notices the latest figures, particularly inflation, show that Slovenia is losing some of the competitive advantage it had over other EU newcomers.
Slovenian Consumers’ Association has found that the services sector heads the list of euro-related price hikes. According to its statistics, services were far more frequently to blame for euro-related price hikes than products. Findings of its Pricewatch project of price monitoring suggest what official consumer price index statistics have also shown that there was more price increases following the adoption of the euro among providers of services than among retailers.
To conclude, most journalists in Malta laud the smooth cross-over from the lira to euro. Even Edward Mercieca’s Christmas panto harks us to drop the lira and embrace the eight pointed cross of our euro currency.

George M.Mangion
The writer is a partner in PKFMALTA an audit and business advisory firm