Government on right track - PM

The fact that the European Union had decided that Malta was suitable for membership of the Exchange Rate Mechanism (ERM) II was further recognition that the Maltese economy and government finances were on the right track, the Prime Minister, Dr Gonzi, said yesterday.

Malta was accepted for ERM II membership late on Friday along with Cyprus and Latvia. As from tomorrow the exchange rate of the Maltese lira will be fully pegged to the euro at the same rate as last Friday. Malta has committed itself to retain that rate throughout the ERM period, which is at least two years.

In a press conference at the Auberge de Castille yesterday Dr Gonzi would not be drawn into setting a target for the adoption of the euro, but said Malta should join as soon as it was practical. However, the date for joining is likely to be January 1, 2008.

Dr Gonzi said joining ERM II was very important for Malta, showing it was serious, credible and committed to achieving the targets set out by the government's convergence programme last year.

He explained that the preparations for Malta to apply for ERM II membership had to be kept secret, as required by the EU, to avoid the possibility of harmful speculation. The decision, he said, was the fruit of 13 months of study by the government, the finance ministry, the Central Bank and other experts in Malta and abroad.

The eventual adoption of the euro, he said, would mean greater competitiveness and easier trade and would enable Malta to fully exploit the benefits of EU membership.

Malta would be eliminating the exchange rate risk, it would have lower transaction costs, greater price transparency, easier access to the EU market and an enhanced credit rating.

What was important now was that the Maltese got used to the euro. A Euro Changeover Committee would be formed and a series of initiatives would be held to prepare the country for the euro, including pricing in Lm and euro.

The government would also monitor prices and guard against retail price increases during the conversion to the euro.

He said the Euro Changeover Committee would be composed of representatives of the government and the central bank, together with representatives from different sectors organised into working groups.

Dr Gonzi insisted that the ERM II membership decision was taken on purely technical grounds and said it was his hope that the euro adoption debate would be technical rather than political. He said the Central Bank had given a presentation to the Opposition of its workings ahead of last Friday's decision. The only reaction from the Opposition he had seen since were remarks by Dr Sant in a political conference as reported by the newspapers, and he therefore did not wish to comment further on this point.

The decision on when Malta would actually adopt the euro would depend on Malta's preparedness. Dr Gonzi said the decision would be taken in the national interest, even though 2008 was election year.

Central Bank Governor Michael Bonello said Malta's application to the ERM II formed part of a logic governing the single European market which promoted the freedom of movement of persons, goods and capital, together with a strong integration of monetary and financial systems.

"In matters like these there is no black and white. But when we evaluated the situation, we concluded that a small open economy like Malta should reduce its vulnerability and form part of a monetary union as early as possible."

Mr Bonello said the change would not affect the exchange rate level of the Maltese lira. "Until we join the euro, the Maltese lira will be the only legal tender in Malta and the euro will still be considered a foreign currency," he said.

The governor said participation in ERM II had to be coupled with structural reforms and achieving the targets of the convergence plan - such as reducing the deficit to below the 3 per cent of GDP maximum by the end of 2006.

He observed that the other five new EU member states participating in ERM II had a high level of national consensus on adopting the euro. This was a great advantage which Malta too should seek.

Asked whether the removal of sterling from the Maltese lira's basket of currencies could have a negative impact on British tourist arrivals, Dr Gonzi said this was most unlikely, since Britons also travelled to the Eurozone countries. And like Malta, Cyprus too, which joins the ERM II tomorrow, depended to a great extent on British tourists.

Mr Bonello regretted speculation there had been on the value of the Maltese lira. He said people who had converted their savings to the euro could now see that it was more profitable to have their savings in Maltese lira because of the higher interest rates.

The workings which led to the ERM decision were published jointly by the government and the Central Bank in a document entitled "Malta's Strategy for participating in Economic and Monetary Union and Adopting the Euro".