Joining the euro

The Prime Minister made it clear last week during a trip to Sweden that Malta should be ready to join the euro by 2003, the year when the next European Union enlargement phase could take place. As the government is hoping that Malta will make it in time for the next EU enlargement, it makes sense for the Prime Minister to say the country would be able to join monetary union by 2003. Whether we are really ready to enter the single currency by 2003 is another matter.

Malta's stand on the single currency should come as no surprise as the 1992 - 1996 Nationalist government had already made its position clear on this issue. Another factor to consider is that the EU has emphasised that no applicant country will be allowed to opt out of the single currency as long as it adheres to the Maastricht criteria on monetary union. Opt outs for countries such as Denmark, Sweden and Britain were therefore exceptions which the EU has no intention of repeating.

Malta's membership of the euro in the long term makes a lot of sense from both the economic and political point of view. Malta would benefit from being part of a strong currency with low interest rates. Although the euro has fared rather badly against the dollar in its first year of existence, most analysts believe this to a cyclical experience: in time the euro should strengthen. In due course, the eurozone will be larger than the dollar zone, because EU enlargement will increase the euro's size to over 500 million people.

One can just imagine the effect this will have on the political and economic strength of the single currency. Companies will therefore have much easier access to larger capital markets. Malta's membership of a stable euro currency will also be beneficial for our export sector and should also encourage mergers and strategic partnerships between local and foreign companies. Malta in the single currency will be beneficial to local tourism and should act as a catalyst for more foreign investment.

The Malta Lira is already pegged quite substantially to the euro and if Britain joins the single currency the euro component in the Maltese Lira would reach about 80 per cent. Considering this, surely it would not make sense to remain outside the eurozone? We are already affected whenever the European Central Bank decides to lower or raise interest rates; we have to follow the trend of the ECB and so staying out makes no sense at all.

Of course, saying we are ready to join the euro by 2003 implies that the government believes that the country's deficit will be reduced to the three per cent of GDP figure as stipulated in the Maastricht Treaty. This means a reduction from the current deficit figure of nine per cent of GDP to three per cent of GDP over a three year period. This is achievable, but will certainly not be easy. We have already had a fair amount of taxes so far and taxes usually decrease as elections approach. The government must be careful not to rush into monetary union by imposing excessive austerity measures which could turn the electorate against Malta's membership of the European Union.

The important thing is that Malta makes it into the first EU enlargement wave and not into the eurozone as soon as we enter the Union. It makes no difference whether we join the euro in 2003, 2004, 2005 or 2006. The key issue is that we join the EU in the first enlargement phase and agree in principle with monetary union, with a view to join the single currency when the economy is ready for it. After all, the EU will not accept any currency into the euro unless the Maastricht criteria are adhered to. So the Maltese government should play its cards well. It is not hard to imagine Malta in the EU and retaining the lira until the deficit is reduced to sustainable levels. After all, Greece, an EU member since 1981, has been prevented from joining the euro until its economy complies with the Maastricht criteria.

How has the euro fared after one year of monetary union? There is no doubt that the euro has greatly contributed to political and economic integration in Europe. For European investors and consumers, the euro has brought about many benefits such as a wave of mergers which create stronger and more profitable companies. Further benefits of the euro have been the huge growth in Europe's capital markets the diversification of portfolios by euroland investors. The single currency has also benefited consumers. Although euro notes and coins will not be in circulation for another two years, prices in euroland are often quoted in both the national currency and in euros, giving consumers the chance to compare prices in the various euroland countries.