On 1 January 2008, Malta will renounce its monetary sovereignty to adopt the euro in lieu of the Maltese lira. The general climate created by the Government and a number of associated “eurofanatics” is one of unfettered optimism. The advantages gained by adopting the euro (which clearly exist) have been trumpeted as nauseam, but scant regard has been given to the difficulties that the single European currency could create for the local economy. In the interests of greater objectivity, a realistic assessment of the main issues relating to the euro is called for.

“It should be easier to compare prices of identical products within the various EU countries, ensuring greater competitiveness to the lowest cost producers and sellers; Maltese consumers would thus be encouraged to shop internationally” Technically true, yet it is not realistic to suppose that this would drive prices down as no account of real differences in national market costs and local price differentials is taken (e.g. local tax differences or wage differences). Prices in Malta are already, to an extent, differentiated, particularly food prices for example in the south of the island, relative to the more affluent north.

“The euro will facilitate trans-border travel; there will be no need for traveller’s cheques”. It seems that we have overlooked the fact that huge advances in electronic cash card debit means that a single currency is already in existence – the so-called “flexible friend”. In other words, anyone can draw money via a foreign bank machine.

“Euro adoption will remove lira floating exchange rates – hence uncertainty – for Maltese businesses trading with other EU member States, enabling them to better plan ahead when dealing with EU firms; the elimination of exchange rate risk and currency conversion costs should result in increased trade”. The first part of the assertion is certainly true, only to the limited extent that the Maltese lira approached a genuine “free float” situation. Thus, given that three fourths of Malta’s trade is with EU member States, a prima facie powerful argument for integration under the euro umbrella exists. This in itself is not sufficient. Under the previous pre-Exchange Rate Mechanism regime for the Maltese lira, local businesses could still plan their transactions by hedging in the market for forward currencies. Furthermore, some of the larger Maltese firms had internal treasury operations anyway. Moreover, the last part of the given quote is pure speculation, since it has never been demonstrated that exchange rate volatility inhibits trade in practice. Indeed, increasing international trade has more to do with macroeconomic and business conditions than exchange rate risk and conversion costs. How significant the costs associated with exchange rate conversion have been for Maltese goods and services in their entirety constitutes a moot point at best.

“With the introduction of the euro we will have no option but to forcibly correct situations of economic disequilibria and adopt a tight budgetary policy due to the fiscal discipline associated with monetary union. This will lead to higher credit ratings and better investment prospects together with greater levels of inward Foreign Direct Investment (FDI). Furthermore, the European Central Bank’s commitment to price stability is beyond doubt and hence a lower interest rate and inflation environment will be good for the Maltese economy generally ”. The first part of this quote is true as the Maastricht criteria require strict economic management, but then again these criteria could be met without joining the euro, as it is (or at least was), an issue of domestic policy. What the euro enthusiasts simply fail to understand is that the removal of exchange rate uncertainty through a single currency by itself is no determinant of greater levels of foreign direct investment; if that were so, they would be hard pressed to explain how the relative depreciation of the Pound Sterling failed to prevent the UK from receiving about 40 per cent of the American and Japanese direct investment in the EU since the mid-1990s. This indicates that even for foreign investment, the euro-imposed fixed exchange rate among EU member States is less important than other factors such as costs, tax rates, labour relations, skills base, language abilities and location.

As far as monetary policy goes, the European Central Bank (ECB) will not be able to take interest rate setting decisions that are tailor-made to Malta’s economic circumstances. The chances are that the interest rate setting decision will understandably take account of the situation in the much larger European economies rather than the smaller peripheral economies. Thus a “one-size-fits-all” interest rate policy will not be in Malta’s interest as Malta’s economic circumstances and conditions are very different from those of larger member States such as Germany and France.

A valid economic argument exists for renouncing one’s currency and monetary sovereignty in favour of a single currency under certain conditions as Robert Mundell (“A Theory of Optimum Currency Areas” (1961)) made clear; the downside however is that these specific conditions apply to a much greater extent to federal countries such as the United States than to the countries comprising the European Union. Why? Simply because an optimum currency area will only function well: a) if the markets (hence the prices) within the participating countries are very flexible, both up and down; b) if wages and salaries within the participating countries are equally flexible; c) if labour mobility among the participating countries is high, therefore also flexible and d) if the instruments of fiscal policy are efficient in terms of financial re-distribution and thus are able to compensate for eventual situations of economic instability within and among the participating members. With an asymmetric shock to an economic and monetary bloc, unless all of the above conditions apply, then some jurisdictions will be very badly affected by such “shocks”, and much more so than others. These shocks – as opposed to “symmetric” shocks – are economic disturbances that affect single currency member States in different ways.

A symmetric shock can be dealt with by a common policy instrument such as a change in the single interest rate, but asymmetric shocks (such as oil price hikes, the effects of German reunification, the introduction of a 35-hour working week and so on) whether direct or indirect, would affect EU member States differently. Thus when Malta within Euroland experiences a negative shock, lowering output and employment, it cannot of course devalue; nor can it lower its interest rate, as control over it has been transferred to the ECB which can only respond to the needs of the currency area as a whole. In the absence of a common taxation policy across Europe, the necessary adjustment must therefore either take the form of a migration of Maltese labour away to more prosperous member States or by a fall in real terms of Maltese wages and prices. Since current studies of labour mobility in Europe show unquestionably that labour is significantly less mobile within individual countries than in the United States or indeed, Japan, and given that these same studies show that mobility between European countries is lower still, then a participant member State is in for real economic pain if it experiences such disturbances. The USA for example is characterized by much less price and wage rigidity than Europe, having traditions of greater population mobility and, as such, is better suited to a single currency.

But surely increasing economic integration will iron out the differences between EU countries making it less likely that shocks will affect countries in different ways. Think again. This optimism is not borne out by experience, as trade is not necessarily a levelling influence. On the contrary, what drives trade is comparative advantage, in other words differences between countries. It is the workings of the market that leads to specialisation and this could actually increase differences between EU member States. Even without new differences, the existing economies of the EU show great diversity and variety, and hence external shocks will affect different countries in different ways. What is perhaps worse, today the development of the European Social Chapter, and indeed the whole thrust of EU social and employment legislation creates the same rigidities and even less prospect of the wage-price mechanism adjusting readily to external disturbances.

The issue of political interference and democratic accountability of the ECB is also worth considering; decisions of the bank will be taken by the Governing Council made up of the heads of all the EU member State participating central banks, so theoretically Malta’s vote will count as much as Germany’s and decisions are by a simple majority. Will the ECB members be as determined as Germany’s Bundesbank has been in sticking rigidly to the requirements of price stability? Probably not, under the one-central bank-one-vote scenario. If French President Sarkozy’s recent comments on France’s inability to achieve Stability and Growth Pact economic targets are anything to go by, ECB commitment to price stability could well go out the window. Incidentally, who holds the European Central Bank to account? Nobody.

The foregoing has served to show that the euro adventure we are about to embark on will come at a real cost, despite some degree of economic advantage. The rank dishonesty of the PN-MLP-AD tandem lies in the fact that these parties had no qualms in hiding the full reality of what the euro has in store for us all. Commitment to the euro was an unavoidable part of Malta’s EU accession, yet it is nonetheless unfortunate that no real debate on euro adoption ever took place in our country – a sad reflection on Malta’s way of doing politics. As in the case of the European Constitution, our “government of dialogue” did not bother to consult or inform the Maltese on this matter, preferring to rely on a campaign of spin. Labour, for its part, said one thing before the accession referendum, did another after the event, and has kept mum ever since. Alternattiva Demokratika simply parrots EU political correctness. Azzjoni Nazzjonali believes in Europe, a Europe of sovereign nation States and will fight to retain Malta’s remaining sovereignty in Europe.

Philip M. Beattie is General Secretary of the Partit Azzjoni Nazzjonali (AN)