The adoption of the euro is expected to produce significant net benefits in the long run for those countries forming currency unions, the governor of the Central Bank, Michael C. Bonello said yesterday.
He said that these benefits – increased external trade and increases in gross domestic product – would arise from the elimination of exchange rate volatility and risk, lower transaction costs, increased competition and price transparency.
The governor added that lower risk premia on borrowing costs and the stronger frameworks for policy discipline prevailing within the euro area are other potential sources of economic growth.
The keynote speaker at a seminar jointly organised by the European Money and Finance Forum (Suerf) and the Central Bank yesterday, Mr Bonello said there will also be long-term costs arising from the adoption of the euro associated with the loss of monetary and exchange rate policy autonomy.
However, the governor also pointed out that studies suggest that the new member states “are not likely to suffer from a more pronounced incidence of asymmetric shocks than the existing non-core euro area members”.
Gaining these benefits, however, depends on the new member states continuing to make substantial reforms to their economic, financial and social systems and gaining adequate support in their respective countries.
There is also a downside to these reforms, the governor warned, and these exposed vulnerabilities which “if not addressed, could threaten their successful participation in the euro area”.
New member states were facing a number of challenges such as the need to catch up in terms of per capital incomes levels with the euro area countries, the need to look out for relatively high inflation rates and the risks of volatility and speculative pressures on the exchange rate due to capital inflows, he said.
“In the run-up to the adoption of the euro, most new member states will also continue to face the challenge of maintaining acceptable fiscal positions,” the governor said, adding that “current expenditures in many of these countries are high relative to GDP, and in a number of them demographic profiles are casting doubts on the medium-term sustainability of public finance.”
The successful adoption of the euro also depended on the implementation of economic policies designed to meet the Maastricht criteria on a sustainable basis, and “the mobilisation of strong support for euro adoption so as to endow the project with the necessary credibility”, the governor said.
He said that certain policy prerequisites for adopting the euro may complicate the mobilisation of strong popular support for the euro project.
“The case for fiscal consolidation may be compelling from a long run growth perspective, but the dividends of such a policy course may fail to materialise in a sufficiently short time to generate the necessary support,” Mr Bonello said.
He said fears of higher prices could generate further scepticism among the social partners: “Let us not forget that it is these same partners that have to be relied on to deliver the flexibility in the labour and product markets that is required for a successful transition to the euro”.
Mr Bonello insisted that “an active and constructive social dialogue is, therefore, necessary to support the process”.
The Central Bank governor said the new member states had registered a lot of progress in honouring their commitments to be able to adopt the euro, sometimes against heavy odds.
Mr Bonello said that judging a country’s preparedness should not only depend on a quantitative economic analysis, but also qualitative, which recognises the difficulty of simultaneously satisfying all the Maastricht criteria in the current world environment, policy consistency over the years and the credibility of the applicant country.