PM for early euro adoption date

Speaking at last weekend’s Barcelona Summit, Prime Minister Eddie Fenech Adami announced that Malta intends to keep the period in which it is a member of the EU's Exchange Rate Mechanism as short as possible before joining the euro.

The statement implies that if Malta is to join the European Union in 2004, then Malta could very well be using Europe’s fledgling currency as early as 2006, as regulations require that the outgoing currency should be stable for a period of two years before the adoption of the euro. After which, Dr Fenech Adami expects to adopt the euro as Malta’s national currency without delay.

EU candidate countries must already implement the process of structural economic reforms EU states are carrying out under the ‘Lisbon’ process and Malta is reportedly already ahead of some existing EU members in this respect.

Finance Minister John Dalli added the talks in Barcelona between the EU and accession country finance ministers were not so much about the "Europe of today but the Europe of tomorrow."

The road to EMU membership is a long and winding one. EU membership in itself implies a commitment to participate in the EMU and to accordingly adopt the euro as Malta’s national currency. However, there is a three-stage process between Malta’s EU accession and full participation in EMU.

The first becomes effective immediately upon accession, when Malta’s exchange rate policy becomes a matter of concern to the whole of the EU.

Meanwhile, the second entails an obligation to join the Exchange Rate Mechanism known as ERM II at a time of Malta’s choosing.

Before joining the ERM II, Malta’s exchange rate regime would have to become fully linked to the euro - effectively removing the US dollar and the pound sterling from the currency basket.

Once the Maltese lira is entirely pegged to the euro, Malta would be able to join the ERM II, once it feels the conditions can be met.

According to Mr Bonello, "Once in the mechanism, the lira would not be permitted to deviate from the chosen rate by more than +/- 15%. Past experience suggests that this should not be a problem since the lira has practically always maintained a zero band in respect of the currency basket. I, therefore, believe that it should be our objective to implicitly maintain the exchange rate within a narrower band than the +/- 15% allowed under ERM II, possibly one of +/- 2.25%."

Following a period of a minimum of two years of ERM II membership and on the condition that Malta fulfils the other nominal convergence criteria set by the Maastricht Treaty, the third stage in the process would be full participation in EMU and the full out adoption of the euro.

If Malta does not join the EU, however, Mr Bonello is adamant that Malta’s overall exchange rate strategy would not need to change substantially from the one currently in place, which seems to enjoy widespread support.

He elaborated, "The alternative policy to [EMU] membership, in fact, also appears to emphasise a close economic relationship with the EU as it involves the establishment of an industrial free trade area. As a result, Malta’s economic ties with the EU are likely to strengthen further. This could imply a heavier weight for the euro in the Maltese lira currency basket.

"Under both scenarios, therefore, a decision to increase the weight of the euro in the basket while reducing that of the other components, particularly the dollar, would be a logical step forward. Indeed, it is a decision we are actively considering.

"This would be based on a revised weighting methodology which better reflects the relative importance of the basket currencies in Malta’s foreign trade.