The euro and the membership debate (2)

The first part dealt with the financial benefits from switching our currency to the euro, an opportunity that is available only to EU members. Our money supply will be made up entirely of euros, while the country's holdings of external foreign assets can be managed in a more flexible manner. They will no longer be needed to protect the currency and they can be dedicated in part to such purposes as underwriting the national pension system.

Another benefit is the stimulus to trade and economic growth that comes from reduced transaction costs. In fact, a market is not truly single until all its parts share also a common currency. Trade becomes easier and there is greater price transparency. Within a currency area, like the euro zone, buyers and sellers across different countries need not bother with foreign exchange conversion.

Ours is a wide open economy, and for some unfathomable reason, Labour critics keep saying that the openness of our economy, and our dependence on foreign tourists, are national peculiarities that make EU membership unhealthy for us. The truth is the very opposite.

A huge part of our external trade is with countries of the eurozone and this is all the more reason to adopt the common currency, both for the savings it will bring in trading costs and for the reduction in exchange rate uncertainty. These benefits are significant. The European Commission estimated that the transaction costs from the coexistence of different currencies in the EU ate up on average almost one per cent of GDP between 1986 and 1995.

The single currency also eliminates exchange rate uncertainty, along with the cost of avoiding such uncertainty. Take the case, before the euro, of an Irish exporter entering a contract to sell goods to a German buyer in exchange for future payment in deutschemarks.

The seller would have been concerned about the future value of the deutschemark. Irish sellers could rid themselves of the uncertainty by paying for a hedge against exchange rate fluctuation. After monetary union, Ireland and Germany now share one currency and this uncertainty has vanished, as did the cost of eliminating that uncertainty.

These are some of the reasons why many of our industrial operators are of the opinion that the euro would benefit their business. Even when the product is sold in a third currency, like the United States dollar, a separate currency still has consequences in a multinational that has plants in Malta as well as in the euro zone. For example, exchange rate changes affect the relation between Malta's wages and the wages in other plants (say in Italy or France). Monetary integration eliminates this source of instability.

An argument put forward against joining the euro zone is the loss of monetary autonomy by the national Central Bank. In reality, as capital becomes free to move abroad, a central bank cannot disregard interest rate levels in the rest of the world. When capital can move freely, exchange rate stability cannot coexist with interest rate differences between countries.

As an EU member, our economy will become more closely integrated with the other European economies, reducing the benefit of monetary separateness, even if that were practically feasible. In addition, our autonomy in monetary policy will be less essential to the extent that EU membership will not only spur economic growth but will also make our economy less vulnerable to cyclical volatility.

The danger of an inflation spurt after the introduction of euro is reduced by a consideration that often escapes attention. The lira is now worth some €2.40. This means that the one cent of our currency will translate in some 2.4 euro cents. This makes possible a finer adjustment of prices than at present while dampening any tendency to round up prices upon conversion into the euro. Yet, the other side labours on, reducing the euro (and membership) debate to the price rises that occurred in Italy due at least in part to the rounding up of prices and the conversion of multiple units of their former currency to a single euro (about 2000 Lit to each euro).

To boot, we heard one declaration from the other side, that "My contention remains that on joining the EMU, Malta will inevitably have to depreciate the lira, whether we like it or not". The reason for expecting a devaluation remains a mystery, but it probably follows from Labour's doctrine of national incompetence.

Labourites seem to think that as a people we can't compete with the nations of the EU and for that reason we would better stay out.

The same logic apparently leads some of them to assume that we would have to precede our journey into the eurozone with devaluation.

But if a separate currency does not require devaluation why is it needed for monetary integration? Logic is often not a strong point in the current anti-EU mould of the Labour Party!

Prof. Bonnici is Minister for Economic Services.