The euro and the membership debate (1)

All those years of contrariness and muddle-headedness culminate in Labour's visceral assaults on EU membership from no fewer than three different angles. Individually and collectively, the three are pretty weak, but the blitz that saturates Labour's media can be pretty loud.

First, there are many Labour voices that disapprove of the European Union itself, burdened as they see it with a thousand ills. This portrayal is incompatible with a score of countries banging at the EU's door, asking to be let in.

Secondly, Labour's leadership disapproves of Malta's membership of the EU, denouncing it as unsuited for us, as the abandonment of our sovereignty and on and on. Again, hard to believe when even the larger EU members have found shared sovereignty far more potent than isolated sovereignty.

Yet, in Malta some have a different opinion. In the words of the GWU general secretary: "we can... go it alone". Tony Zarb's way of facing the tsunami of globalisation is to bury his head deeper in the sand. Quite incredible for a small country whose foreign trade figures usually exceed its GDP!

Next, Labour disapprove of the terms that the government negotiated. In particular, they complain about the pittance of the Lm81 million that Malta will receive in net financial benefits in the first three years.

They unjustly claim that the true amount is only Lm1.5 million. Commissioner Günter Verheugen pointed out graphically that the Lm81 million (adjusted upward for inflation since 1999) is many, many times greater than the pennies from a partnership deal (whatever that is).

Alfred Sant responded with a reference to pictures of the bombs of World War Two. This was just as intelligent and diplomatic as the threat to bite off the other's tongue. Clearly, Dr Sant does not expect to ever sit down and negotiate with any EU commissioners!

The rest of this two-part article will probably not change any prejudiced and stubborn mind but let me try anyway.

Membership of the euro will provide Malta with another major benefit that so far has been largely overlooked. Once we join the EU, a next important step will be our participation in the European single currency. Such participation is available only to EU members, not partners.

The currency in our pockets (some Lm440 million) will be euros, liabilities of the European Central Bank. The deposits at our banks will become euros as well. Our money will be an international reserve currency.

We'll be part of a huge monetary system that will turn our medium of exchange and monetary stores of value into one of the world's leading currencies - with significant wealth generating benefits in the process.

Now, to travel or buy goods abroad, we start out by exchanging liri for foreign exchange. In the euro zone, the cash in our pockets and the deposits at the banks will themselves be "foreign exchange". Now when our businesses sell abroad, they convert the proceeds into the liri that they need to pay their wages and so on. Inside the euro zone, there is no such conversion.

Now, to protect the lira, our Central Bank holds a very large volume of foreign financial assets. Once we join the euro zone, there will be a radical change in the purpose of these assets. The economy that is behind the European monetary system is large, strong and diversified, less needful of the "backing" that our isolated currency gets from the locked foreign reserves. The magnitude of the switch is huge. Our Central Bank's external assets include some Lm878 million in convertible currencies alone.

What do we "give up" in exchange? We have to meet the convergence criteria, ensuring that the condition of our economy promotes the stability of the euro. Malta's inflation has to be within 1.5 per cent of the three member states with the lowest inflation.

Long-term interest rates must be within two per cent of the three lowest-inflation countries. The criteria also forbid excessive government deficit (above three per cent of GDP) and debt (above 60 per cent of GDP). They also require exchange rate stability. Being part of the euro zone makes for more credible monetary and fiscal policies and improves our sovereign rating.

Malta will provide its contribution to the capital and reserves of the European Central Bank. A country's contribution varies with economic size and population and ours will be about E40 million or Lm16.6 million, on present criteria - which, of course, remain ours.

The external reserves will remain what they are now - external reserves. But they can be invested in a manner that best suits the national interest and will not be subject to the risk of speculative attack, as is the case now.

One potential use would be to underwrite our pension funds. In any case, there will be greater flexibility in the management of the national foreign assets. This added flexibility can be turned into a greater return in terms of added income from the nation's foreign assets. Certainly partnership provides none of the above benefits!

Prof. Bonnici is Minister for Economic Services.

The second part will be carried tomorrow.