Convergence of Malta lira with euro

Currencies converge when the economies underpinning them move close to each other. Many economists contend that money is a veil. It has no meaning outside that given to it by the productivity of the economy.

It was useless for Argentina to peg its peso to the US dollar, when it was borrowing massively abroad at ruinous rates of interest, while failing to collect taxes. Dollarisation did not save Argentina since it failed to adopt the hard rules of Anglo-Saxon capitalism.

A currency is no magic wand, and will not function if there is a corrupt socio-economic system. Argentina was the richest Latin American country, yet its wealth did not prevent it from falling into economic ruin. This is not to say that Anglo-Saxon capitalism commits no mistakes and has no corruption.

The difference between capitalism in the United States, Argentina and many European Union countries is that in America it is not held in thrall by the monopoly power of trade unions and that of the financial establishment.

Trade unions are much less powerful in the US than in Argentina, where the exuberant demands of the working class have become enshrined in Peronism. In Europe we have seen the decline of German industry caused, in no small measure, by the introduction of worker directors into company management.

The financial establishment in the US possesses strong powers of self-defence against corruption. This is seen in the case of the Enron scandal, where both the company and the auditors are paying a heavy price for their wrongdoing. Europe has yet to learn from the Enron accountancy scam, for the same strategy was adopted by Italy to seek qualification for entry into the euro.

The European economy

The European economy with which Malta is seeking to converge has certain characteristics and objectives. It is deeply conscious of its inferiority to the US both as regards productivity and financial organisation.

The EU has no equivalent to Silicon Valley, and the mass of venture capital engineered by the Nasdaq, when it was under the leadership of Frank Zarb. In Malta the pro-EU party speaks no words about the shortcomings of Europe, while leading European personalities speak frankly about what has to be done if the old continent is not to be submerged by the overwhelming growth in US productivity.

Malta seeks economic convergence with the EU, but it is trying to join in union, or in partnership, with a continent that is in turn seeking convergence to the tougher conditions of Anglo-Saxon capitalism. Malta's progressive convergence to Europe is a result deeply conditioned by the EU's proclaimed ambition to converge with the US.

The EU ambition is to develop a type of economic organisation very different from what would please the GWU, for example. Official EU policy is spelt out in an article of Frits Bolkestein, European Commissioner for the internal market, in The Economist yearbook The World in 2002.

The EU economic order Mr Bolkestein envisages is very far from that of the game of social partners consultation we see wearily on our television screens, and identical to a US capitalism that has known how to produce results and fill the larders of its workers.

Mr Bolkestein wrote: "When people consider how best to improve Europe's economic performance, they often concentrate on short-term considerations, such as the level of interest rates or governments' budget deficits. These are of course important.

"But the real economic challenge facing the EU concerns the longer term. In particular, Europe has to improve substantially the efficiency of its markets for products, services and capital. The best way for Europe to meet this challenge is by developing the full potential of its single market. This was recognised by the European Summit in Lisbon in March 2000. Europe's leaders set themselves the aim of making Europe the most competitive economy in the world by 2010 and agreed on an ambitious programme of measures to meet that target.

"This programme includes creating optimal conditions for innovation and e-commerce, fully integrated financial markets by 2005 and an accelerated programme of liberalisation of markets for energy, postal services and transport."

Character of convergence

It is a fact that there is a close convergence between Malta's economy and that of the EU, but one cannot fail to notice that Malta's exports are becoming increasingly globalised, with the US becoming the greatest single buyer.

This means that the American dollar will continue to loom in a disproportionate manner on the development of Malta's economy. At present the Malta lira is underpinned by three hard currencies: it is backed by reserves up to 56% by the euro, and about 22% by the US dollar and sterling respectively. Malta's exchange rate can be said in economic terms to be a defensive exchange rate.

It is not backed by demand and supply but it does reflect the currencies of Malta's major trading partners. It is designed to compensate for Malta's economic weakness, a defence that will disappear if and when Malta joins the euro.

Malta's adherence to the euro is still some time away, but it is a likely occurrence even, as we shall demonstrate, if Malta does not join the EU. No government will dare to challenge the progressive convergence of Malta's exports to the area of the Western capitalist countries which includes the US. The EU, as Mr Bolkestein has stated, is converging its economy with that of the US.

Malta's exports

Malta's exports are increasingly moving in the direction of the US. The principal purpose of a currency exchange rate is to help the demand and supply of that country's exports. That is why a study of the evolving pattern of Malta's exports is indispensable for a determination of the rate at which the Malta lira will enter the euro.

This is no easy matter and even if a right decision is taken - as it will - it will be hard to implement. It requires the support of a public opinion educated by an intelligent public relations campaign, and not by demagogic slogans.

During the ten years from the 1990 to 2000 there was a remarkable change in the structure of Malta's exports. In 1990, 77% of Malta's exports went to the EU, while in 2000 only 34% went in that direction.

Such a trend, that is of indisputable significance in the determination of an exchange rate, is monitored from the figures of Malta's exports to the US. In 1990 Malta exported only Lm13.7 million to the US, while in 2000 it exported Lm293.9 million. The figures for 2001 are still provisional, but they are not expected to alter a trend made evident in these last years.

Up for adoption

The consensus in Europe is that the euro, in spite of its shortcomings, is up for adoption. It is a fact that some EU candidates favour an early move to the euro. There are in Europe some strong and knowledgeable critics of the euro.

One of them is the economist Walters, who advised Margaret Thatcher. This economist has a long record of correct predictions, and he is foretelling the euro collapse. What Walters is underestimating is the desire among Europeans to forge political unity.

This longing will see Europe through the contradictions of the euro, which are many, as Walters and others have noted.

This history of monetary unions suggests a high failure rate. If a country were to leave the euro it would have to reissue its former currency and face significant economic dislocation. Countries which have adopted the euro face problems connected with different growth and inflation rates.

Such problems will become more evident by the time Malta will be seeking entry into the euro. The evidence at present is that such economic difficulties will be ove rcome by the political will of Europe to forge a new destiny for the continent. There is ample evidence of Europe's strengthening its political will.

This is an intangible factor, which we must take into consideration in our monitoring of the convergence between the Malta lira and the euro. A currency is a political instrument besides being an economic one. This fact cannot be emphasised enough.

The move to the euro

We have noted that some EU candidates are favouring an early move to the euro. This means that it might be possible for Malta to adopt the euro even if it does not join the EU. The Economist has recently studied this situation and it furnishes the following analysis:

"While three members of the European Union, Britain, Denmark and Sweden, dither about adopting the euro, some Central European states, which would like to be EU members, are considering putting the cart before the horse. They think of making the euro their official currency even before joining the Union."

Physically, at least, neither the European Commission nor the European Central Bank (ECB) can do much to stop them. Indeed, Montenegro and Kosovo - although not EU candidates or even independent countries - switched from Deutschemarks to euros on January 1.

In November 2000 the European Council made clear that countries wishing to join the EU should follow the prescribed path to the euro: waiting until they have joined the Union and then putting their national currency through two years of 'purgatory' in Europe's second-generation exchange rate mechanism, as well as fulfilling the other Maastricht criteria.

The Council also insisted that the exchange rate at which a country joins the euro should be decided jointly, not unilaterally. The use of currency boards - Bulgaria, Estonia and Lithuania have all tied their national currencies to the euro - is about as far as Brussels will let these countries go.

The matter of non-EU countries adopting the euro should interest all Maltese politicians, especially those who do not see this archipelago joining the EU in the near future. It requires pondering, discussion, and carefully monitoring of all the economies of Europe.

This is indeed a tall order for economists, whether with government or in private enterprise. In Malta the work produced by a handful of economists is performed in Europe by research offices employing hundreds.

The debate has been opened and The Economist asks: "But what would happen to a non-candidate country that adopted the euro and then applied for EU membership? Would it be disqualified for being too fond of the euro?"

This article has sought not to pontificate but to explore the difficulties inherent in the convergence of the Malta lira to the euro. I hope to have shown that this is a problem that has to be faced whether or not Malta joins the EU.

Mr Azzopardi Vella is an adviser to business and has been a promoter of the Malta Development Fund.