The Malta Independent 23 February 2020, Sunday

The Exchange rate saga: an issue that needs to be addressed

Malta Independent Tuesday, 14 December 2004, 00:00 Last update: about 7 years ago


“The government seems impatient to take Malta fully into the Eurozone. If Malta moved in at an over-valued exchange rate the result could be a double-decker calamity…” – Economist Lino Spiteri, The Times, 6 December.

“Most of the public debt is in the Maltese lira: some Lm1.2bn of the Lm1.4bn. This can also help us to enter the ERM2 at a suitable rate. It is better to enter ERM at a lower rather than a higher rate…” – Financial consultant Alfred Mifsud, The Malta Independent, 10 December.

The government is about to commit two blunders.

Not only is it reluctant, because of political obstinacy, to take heed of the opposition leader’s advice regarding our over-valued currency but it also seems determined to rush headlong into ERMII, the antechamber that precedes EMU membership, possibly well before the new year is out.

Relying on the second option will make it virtually impossible to take Dr Sant’s advice to adopt a gradualist approach to our currency depreciation, since it will be denying itself the necessary breathing space that his proposal calls for. That is unless they want to adopt the more drastic surgery being recommended by certain economists to go for the jugular by resorting to devaluation with all its attendant negative effects.

Rather than criticising Dr Sant for having raised the whole depreciation issue in the context of a set of various measures to kickstart the economy, the government side should have realised that with Malta on the threshold of ERM 2 membership, the function of the exchange rate in the economy should have been currently under discussion. Not only at Central Bank level but also at the level of the key social partners, including the major political forces on the island.

Membership in the ERM 2 and the level of central parity in the framework of the mechanism need to be seen on two levels – as a precondition for the fulfillment of the nominal criteria of membership in the Euro area and in the context of the role of the real exchange rate as an instrument for maintaining/recovering macroeconomic stability.

ERM2 membership creates certain determinations for the exchange rate development set by the definition of the exchange rate criterion, or respectively its application in practice.

In other words the exchange rate should be perceived as a means for maintaining the economy close to its equilibrium.

Certain decisions must be taken now while ERM2 membership should be postponed to a much later date, since by entry to the Euro area, a country practically gives up control over the nominal exchange rate as an instrument for resolving macro-

economic imbalances.

We need the economy to move back to the level of potential output and to external equilibrium without undue delay but without exercising shock therapy at the same time.

Foreign affairs snippets

• I have come to learn that the Foreign Ministry was irked about my disclosure that the President’s 5 November 2005 visit to Spain cannot be treated as a State visit by the Spanish authorities as well as that Spanish Foreign Minister Moratinos, although wishing to take up the invitation to visit Malta in the first half of the New Year, will not be coming to inaugurate the Embassy in Malta (as his predecessor had in mind doing).

• It is reliably understood that the Foreign Ministry has set up an Israeli/Palestinian Conflict working group. I am not too sure whether any close relatives are involved.

• No valid reason has been given so far as to why so many Council of Europe protocols and conventions have not been ratified yet by the Maltese government.

• One sincerely hopes that after our failure to clinch the Euromed Foundation for Culture and Civilisation, which ended up being located in Alexandria, and the strong possibility that the EU Border Agency will be located in an Eastern European country rather than in Malta, we will be successful in securing the secretariat of the General Fisheries Commission for the Mediterra-nean. I understand that San Tumas Tower and Spinola Palace have already been identified as possible sites for this secretariat. But then one should not be too over-confident. After all, offices had already been identified for the Euromed Foundation for Culture and Civilisation and yet our efforts turned out to be unsuccessful.

Regarding the Fisheries’ Secretariat, I understand that our strongest competitors are Spain and Italy. Let us hope that we shall be third time lucky!

e-mail : [email protected]

Leo Brincat is the Main Opposition Spokesman for Foreign Affairs and IT

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