Goodbye to all that

As is well known, Josef Bonnici wears two hats - one of a politician and the other of an economist. In his two-part article "The euro and the membership debate", Minister Bonnici, as expected, deftly promoted his pet subject: Malta's membership of the European Union.

From an economist one expected some enlightenment on the euro, but he failed to impress on the subject.

He does not believe that "we can... go it alone" and merely used the bugbear of the "tsunami of globalisation" to rebut that. If he was too young at the time, he is not in a position to compare what he calls the "tsunami of globalisation" with the hardships we went through from day one of independence until we could stand on our feet years later.

"The currencies in our pocket (Lm440 million)," he wrote, "will be liabilities of the European Central Bank (ECB)". How could it be otherwise after the ECB takes over the responsibility to hold and manage our Central Bank's external assets which "include some Lm878 million in convertible currencies alone"?

One wonders that Prof. Bonnici still subscribes to the hoary notion that "to protect the lira, our Central Bank holds a very large volume of foreign assets (reserves)". Which country now holds its reserves to back its currency? Not the US, not the UK, for instance. Do not economists now hold that the level of foreign exchange reserves indicates a country's ability to pay for its imports and as a yardstick for coverage of imports for a number of months?

The idea of backing the currency in accordance with the level of reserves harks back to the days of the classical gold standard, or, nearer to our case, to the Currency Board which operated in Malta between 1949 until the setting up of our Central Bank in 1968.

Minister Bonnici was recently reported as saying that Malta will no longer have to hold reserves. He now writes: "The country's holdings of external assets... will no longer be needed to protect our currency."

This last part was dealt with above. He knows very well that the problem of the balance of payments will not go away if and when Malta joins the EU. The payment for our excess of imports over exports then will be settled by the ECB once it takes over our foreign exchange reserves.

"Exchange rate changes," Prof. Bonnici wrote, "affect the relation between Malta's wages and the wages in, say, Italy and France." There could and would be no "exchange rate changes" once Malta joins the EU since it then will not be able to devalue the euro, Malta's new currency.

Later on he wrote (a) "an argument put forward against the eurozone is the loss of monetary autonomy by the national central bank". Membership of the eurozone, like it or not, means a loss of monetary independence since Malta's monetary policy will then be made in Frankfurt by the ECB, particularly the fits-all-interest rate.

Why has Prof. Bonnici not made it clear that, once Malta is in the eurozone, our Central Bank will then be able to issue bank notes and coins only with the ECB's consent?

And (b) "our autonomy in monetary policy will be less essential to the extent that EU membership will not only spur economic growth..." Why less essential? Frankly, one must be astonished to read this from the pen of an economist who should know that monetary policy affects investment (interest rate), employment, the price level, balance of payments (exchange rate) and growth. Moreover, he seems not to have realised by now, like most economists, that what The Economist called "the three inflexibilities" are the cause of not spurring growth in the EU. These inflexibilities, in brief, are: the fits-all-interest rate, the fixed exchange rate and the stability pact.

The imposition of these inflexibilities means that a country is stripped of all its macroeconomic weapons.