The fiscal and economic criteria that Malta was required to achieve in order to join the eurozone area are, and continue to be, fundamental for economic success in today’s competitive and globalised world, said Prime Minister Lawrence Gonzi yesterday.
Dr Gonzi was speaking during the National Conference on European Economic Monetary Union Governance and Euro Changeover – Malta on the Path to the Euro – at the Westin, which was addressed by Malta Central Bank governor Michael Bonello, European Central Bank president Jean Claude Trichet and the European Commissioner for Economic and Monetary Affairs, Joaquin Almunia.
Dr Gonzi said Malta was in the final stages of another monumentous leap forward in its economic and political history as a result of joining the European Monetary Union.
The Prime Minister said that EU membership signified a new beginning for all Maltese. “Politically it was a homecoming. Economically, it allowed us to further integrate with our main trading and investment partners. Socially, it has stimulated a quality leap in all sectors that affect our daily lives,” he said.
Dr Gonzi said that in the three short years of EU membership, he has had the pleasure of seeing Malta grow in its potential at every level: competitiveness, employment, foreign direct investment, financial services as well as some higher value-added manufacturing, tourism and the maritime sector.
“This is all happening in the context of major investments in education, health and the environment. All this is creating a momentum of activity that, in truth, has not been seen before,” said Dr Gonzi.
He said it needed to be noted that Malta’s potential was growing despite the challenges that were arising internationally. “These international challenges include the upsurge in the price of oil and the transfer of investments to China and other emerging economies,” he said.
Dr Gonzi said the increases in the price of oil have caused pressure in many areas of the economy, while the shift of investment has led to the closure of major textile firms in Malta and the loss of thousands of jobs, at a time when the restructuring of major state-owned companies was also leading to job losses.
“Notwithstanding these major negative events, not only is our potential growing in many sectors but the economy has actually grown in real terms while unemployment has fallen,” he said.
Speaking about the Stability and Growth Pact, Dr Gonzi said it was all about sound economic and financial governance. “It is about the need to have solid public finances that can support economic growth in the face of unexpected challenges. It is about a reform process that increases competitiveness and makes an economy more attractive for investment,” he said.
Dr Gonzi said that Malta’s increasing competitiveness has resulted in thousands of new jobs in the pharmaceutical sector, aeronautical engineering, the financial services sector, and IT. “It explains why this government can spend millions more on new schools, on computers and many more items, rather than on some uncompetitive state-owned company that only continues to survive because of subsidies paid from our taxes,” he said.
Dr Gonzi said the fiscal and economic criteria that Malta was required to achieve in order to join the eurozone were, and continued to be, fundamental for economic success in today’s highly competitive and globalised world.
“The criteria that we needed to achieve were – in themselves – vital for the long-term development of the country. Irrespective of euro membership, the ideals and targets enshrined in the Convergence Criteria, are sound economic principles of good governance. The euro objective gave us the necessary momentum and discipline to achieve, in just three years, what sceptics described as a 10-year project,” said the Prime Minister.
He also said that Malta’s journey to the eurozone was part and parcel of the country’s undertaking to translate EU membership into the social wellbeing of all the country’s citizens.
“Much of the focus was on economic convergence, yet the treaty calls for more economic and social cohesion among member states by raising the standard of living and quality of life, achieving a high level of employment and social protection and sustaining growth which respects the environment,” he said.
He continued: “The implication is obvious. Introducing the euro must continue to be a process for advancing our standard of living and quality of life.”
In conclusion, Dr Gonzi said that we have to be ever vigilant to threats, such as the pressure which will arise from increase in the prices of grains and cereals. “But I am confident that with a concerted effort, we can make sure that the changeover will take place in the smoothest possible manner.”
Central Bank governor Michael Bonello
Reaching the milestone of euro adoption was by no means an easy task, and at the level of macroeconomic policy, difficult decisions were called for, and taken, to start addressing existing imbalances and other impediments to growth, in order to satisfy the Maastricht criteria.
“During more than two millennia, the Maltese people have used many different currencies in circumstances often dictated by the changing balance of power in the Mediterranean, and reflective of Malta’s status as a dependent of some larger and more powerful nation. The adoption of the euro, however, is a change of currency with a difference,” said Mr Bonello.
He said that this time it would occur because Malta, out of its own choice, would join 14 other sovereign member states of the EU, in an economic and monetary union designed to complement the single European market, a venture that could rightly be described as an epoch-making development in the history of the continent
The euro, said Mr Bonello, offered the prospect of enhancing the economy’s potential to grow faster. “The elimination of exchange rate risk and currency conversion costs, should result in increased trade, while the low interest rate and inflation environment of the euro area should make for reduced business costs and greater macroeconomic stability,” he said.
He said a key benefit of eurozone membership will be the elimination of the risks inherent in managing a small, vulnerable currency, and their replacement by the greater security afforded by the world’s second most important currency.
“Put simply, the task that Malta faces is to bridge the remaining income gap with the more advanced members of the euro area. The success of this endeavour will depend importantly on how effectively the public and private sectors work together, both in assimilating the lessons learned during these first years of EU membership and in implementing appropriate policies,” he said.
Mr Bonello said that since in a resource-poor and open economy like Malta’s, growth must be predominantly export led, the focus of policy must be on increasing the country’s international competitiveness.
“The economy has indeed been growing at more than three per cent for almost three years and broad-based reforms have helped to mitigate structural impediments in a number of areas,” he said.
He added that after the upgrading of the physical infrastructure during the past two decades, recent reforms have included the restructuring of the public and public-enterprise sectors, a wide-ranging privatization programme, port reform and the first stage of a pension reform, and the full liberalisation of the trade and capital accounts.
Looking beyond the introduction of the euro, therefore, the task was to maximize the benefits of participation in monetary union by making further progress on the path of reform.
“It also needs to be realized that these reforms are essential for safeguarding our social model. In recent decades we have been successful in reducing income inequality and in securing universal access to all levels of education, to health care and to pensions. These benefits, however, can only continue to be enjoyed by future generations, if today’s generation implements the necessary reforms,” he said.
European Commissioner
Joaquin Almunia
“In precisely 91 days, you will celebrate the arrival of a new currency, ushering in a brand new chapter in the history of your country. Before I talk about what this means for Malta’s economic future, let me first offer my warm congratulations to all of those who have helped bring Malta to this point,” said Commissioner Almunia.
He said that just four years ago, Malta was preparing for EU accession and the possibility of euro adoption seemed only a distant goal. However in July, the Maltese commitment to sound economic policies and bold reforms were rewarded with a green light to join the eurozone.
Mr Almunia said practical preparations towards currency changeover were remarkably advanced. “Indeed, the National Euro Changeover Committee can only be praised for their excellent work, preparing the ground for what we all hope will be a smooth and successful changeover. This does not mean that the hard work stops now. There is still plenty to do before January 1st 2008 as well as after,” he said.
For Malta, the economic benefits of the euro would be substantial. Not only was this the smallest of the EU member states, it also had one of the most open economies, with average import and export to GDP ratios of over 80 per cent. In the past, this has made Malta vulnerable to external shocks and volatility. Membership of Economic and Monetary Union would provide a shield against such shocks, and an anchor for macro-economic stability, said Mr Almunia.
He also said the solid credibility brought by the euro should give a healthy boost to foreign direct investment, while the disappearance of exchange rate risks and transaction costs can be very beneficial for business. This will be a significant advantage for a country such as Malta, whose intra-EU trade with the euro area exceeds 75 per cent.
“I urge all actors to ensure that they are fully prepared for the arrival of the euro and to make certain that consumers are well informed and ready to handle their new currency,” he said.
Speaking about fear of inflation, Mr Almunia said: “I know there is still widespread apprehension concerning the euro’s impact on prices. This is not helped by the fact that the euro has been mistakenly blamed for this summer’s high food prices. In fact, rising costs are the result of low harvests in many regions of the world, bad weather in Europe and growing demand from East Asia.”
Making sure that public finances are sound and sustainable was vital, said Mr Almunia, adding that fiscal discipline cannot be stressed enough.
“Structural reform, the second condition for success in EMU, holds the key to smooth adjustment and competitiveness in the eurozone. I know that Malta has already implemented a series of important measures that appear to be paying off,” he said, adding that Malta now needed to quicken the pace of structural reform if it wanted to secure competitiveness.
Concluding, Mr Almunia said: “I am confident that, together with Cyprus, your addition will be another great chapter in the success story of European economic integration, and I look forward to welcoming you to EMU in January”.
The eurozone had successfully weathered several common shocks
– ECB president
The president of the European Central Bank, Jean Claude Trichet said: “Examples show that the euro is having a remarkable impact, particularly on the financial market segments that are more directly affected by the single currency and monetary policy, such as fixed-income markets. Hence, interdependence within the euro zone is becoming stronger.”
Mr Trichet’s speech focused more on the pan-European impact of euro adoption, and said that the currency had proved to be a success. “The euro area has become more resilient to external developments than its individual member countries ever were before the launch of the euro. National economic policies have become better coordinated and the intra-European impact of external exchange rate turbulences has been, of course, totally removed.” He continued, saying that since 1999, the eurozone had successfully weathered several common shocks, including the bursting of the “dotcom” bubble, the ripple effects of the terrorist attacks in the United States on 11 September 2001, the surge in global commodity prices and energy prices in particular, and the persistence of sizeable global imbalances. “These shocks were very significant and evidence shows that they spread in similar ways across eurozone countries. They have not played an important role in the dispersion of output growth and they have not contributed to economic divergence,” he said.
Mr Trichet continued: “As we have seen, the economic and financial environment is changing, and eurozone countries are gradually becoming more integrated and mutually interdependent. The effects of EMU have been beneficial, in line with the expectations of the 317 million people in the eurozone and, more generally, the 494 million citizens of the EU.”
He said that the eurozone is experiencing low inflation and low macroeconomic volatility, both in historical terms and compared with other single currency areas, such as the United States. “Let me remind you that over the eight and a half years since the creation of the euro, employment in the eurozone has risen by almost 15 million people, compared with a rise of around three million in the eight and a half years preceding the adoption of the euro.”
PS Tonio Fenech
Finance Parliamentary Secretary Tonio Fenech said that in the late eighties and early nineties, after a long period dominated by the pursuance of inward-looking policies, Malta started a rapid process of liberalising product and service markets. This led to the gradual dismantling of trade barriers, the liberalisation of capital controls and the opening up of internal markets. Needless to say this induced unprecedented levels of competition, which, although painful at times, had over the long term led to higher efficiency, that was manifested in wider choice and better-quality products, as well as lower prices.
“A privatisation process was also initiated, which saw a number of publicly owned companies being sold to private investors and listed on the newly born Malta Stock Exchange,” he said.
Speaking about the road to euro adoption, Mr Fenech said a notable challenge was to achieve fiscal discipline after years of excessive spending. “Through a combination of expenditure restraint and improved efficiency in the tax collection process, the fiscal deficit was reduced from 9.8 per cent of GDP in 2003 (including a one-off transaction of 3.1 per cent of GDP in relation to the restructuring of the shipyards) to 2.4 per cent in 2006,” he said. Mr Fenech said the government was now aiming for a record budget surplus by 2010.
Mr Fenech said the government strongly believed that the introduction of the euro would contribute to the pursuance of these objectives. “The euro will foster further macroeconomic stability, encourage more trade with the eurozone members and with the rest of the world, and will open up new avenues for growth,” said Mr Fenech.
Malta will adopt the euro at a time when the economy is staging a sound performance. After a period of sluggish growth – in 2005 and 2006 – the Maltese economy grew by around 3 per cent. “We are expecting this growth to continue at similar rates in both 2007 and 2008. However, there is certainly no room for complacency. There are a number of structural issues which need to be addressed very rapidly in order to make a success out of eurozone membership,” he said.
Malta must cope with unfavourable demographic trends, low employment rates, higher oil prices and with the pervasive pace of global competition. Added to that, we also had a large current account deficit, part of which was due to the catching-up process, but which also reflected, to some extent, weaknesses in our international competitiveness, he said.
Mr Fenech continued: “To make a success out of eurozone membership, we have to ensure that our economy becomes more competitive, dynamic and flexible, by effecting further structural reforms in line with the Lisbon goals. These reforms are worth pursuing not only because of the euro, but also because they are in the country’s long term interest.”
Mr Fenech concluded: “In a few months time, Malta will write a new chapter in its history. It will become part of one of the most successful projects in the history of European integration. The adoption of the euro is more than a simple change of the currency we will carry in our pockets. It is a symbol of the hard work and of the historic achievements of our country.
“I am sure that Malta is well-placed to benefit from the adoption of the euro. Likewise, I am equally sure that Malta will do its part to be a successful eurozone member, and that it will contribute in its own way to this unique European integration project.”
