Central Bank gearing up for EMU membership

- timing of ERM II membership dependant on progress in convergence

By Julian Manduca

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 correction."