Finding A soul for our euro

Malta Independent Sunday, 5 February 2006, 00:00 Last update: about 19 years ago

So now we have a face for our euro. The real challenge is finding a soul.

It is important to get the symbolism of the changeover from Maltese lira to euro out of the way as soon as possible to permit proper focusing on the ‘soul’ issues of the matter. I am pretty sure we can handle all the logistics of the changeover, from the replacement of notes and coins to the shift of all accounting and reporting, including past historical figures for comparative purposes, without undue stress. I am sure that we can quickly adopt retailing under euro pricing and to valuation of existing contracts and investments denominated in Maltese lira in new euro terms without any major mishaps. Six months into 2008 all this will be behind us, and the Maltese lira will be little more than a historical relic.

What I am not so sure we can handle is the need to re-structure our economy to remain competitive and achieve fast economic growth in order to make the adoption of the euro a positive experience when we would be sharing a monetary union with other countries whose economy is much more flexible than ours and much better poised on growth trajectories we can only dream of. That is the challenge of finding a soul for our euro!

It is a source of apprehension for objective analysts that we seem to be approaching such a monumental and irreversible decision with an air of nonchalance. We seem to be in a mind-set that converting to euro is a ceremonial event not dissimilar to the experience we had when we had converted from shillings and pence to decimal cents and mils.

It is quite different. What happens when we convert into a monetary union is that we will be giving up one of the few levers we still have for economic management and get locked into a fixed exchange regime, which would be a shared structure with other countries in the monetary union. Our survival and enrichment in the new structure will depend on making our economy as competitive and flexible as that of Estonia, Lithuania, Latvia and Slovenia, which are basking in the economic sun while we merely survive in a seemingly interminable economic winter.

The administration seems to believe it can address our economic ills by merely talking positively about them and harping nauseatingly that we are on the right track. The issue is not whether we are on the right track. It is how fast are we moving forward along it.

And more than that. Not only how fast but also how stable. The truth, if it is to be said, is that the little economic growth we are registering is very unbalanced. We do not have economic growth spread across all sectors. Growth in manufacturing and tourism is conspicuous by its absence. Our growth is focused on construction and real estate development, which strangely enough demands labour resources that are already in scarce supply and for which we have come to depend on illegal immigration.

We have a very strange phenomenon that is stretching into uncharted economic territory. How resilient is the economic equation where retail inflation remains subdued whereas asset prices keep rolling forward like an unbridled horse? Can we underwrite a system where wage growth remains restrained while consumption continues at superior levels as consumers wind down their savings feeling comfortable that the reduction in savings, or in some cases the higher level of consumer debt, is well compensated by the increase in their overall wealth through higher real estate and exploding equity prices quoted on the Malta Stock Exchange.

These are the issues that have to be discussed and addressed if we are really to find a soul for the Maltese euro. Otherwise we would be rendering our future as a hostage to fortune.

One of the things that people do not seem to realise is that package of the monetary union in the euro comes with an obligation to have the same domestic interest rates applicable for the entire monetary union. The level of such interest rates is decided by the European Central Bank, which has to take into consideration both domestic (i.e. euro area – wide issues) as well as international issues. Certainly the state of the Maltese economy will have very low priority and practically no influence whatsoever on the level of interest rates for the euro.

Growth in the real estate and construction sectors are very much dependent on low interest rates, the sort of we have been experiencing since 2001. If the market turns, as it has a habit of doing over an economic cycle, and euro interest rates move to much higher levels than we seem to take for granted, this could very well puncture the only areas that are producing some growth. We could see a sharp correction in asset prices, which deflate the economy unless, in the meantime, we can render it flexible and competitive to put new verve into our manufacturing and tourism sectors.

The real challenge is finding a soul for the Maltese euro, a challenge we are disregarding at our own peril.