Malta’s latest topic for conversation in bars and on street corners is the introduction of the euro as legal tender in 2008, with some fearing that the change of currency will cause inflation. Michael Carabott caught up with NECC Executive Director Alan Camilleri, who explained that these fears are unfounded and that such speculation is actually the cause of inflation.

One of the issues that the National Euro Changeover Committee wants to tackle is the fear of inflation. Mr Camilleri explained that inflation is a strange phenomenon that can even be sparked off by mere speculation.

“We are very aware that there is a perception that prices will rise because of the euro introduction. We need to address it by helping people to understand the issue. At the same time, the more we talk about inflation, the more it will happen.

“If a person expects prices to rise, that person will automatically not be surprised if prices rise. Consumers should fight this perception by adjusting their expectations, while being on guard against unjustified price hikes,” said Mr Camilleri.

Consumers have a very active role to play in managing inflation, he said. “We are not operating in a static market. People have a wider choice nowadays, and they can exercise the right to choose where they shop. They may also choose to blow the whistle on people that abuse the system.”

In reality, most businesses do not abuse the system, said Mr Camilleri, but there might be a few who are tempted to make an easy buck from the changeover. “Obviously, if the consumer is vigilant, these people will be weeded out through a natural process of competitiveness in the market,” he said.

Another issue that the NECC will be highlighting in its information campaign is the importance of making the right conversions. “With the 0.4293 conversion rate, one Maltese lira is 2.33 euro – it’s a bit of a hassle to work things out, especially to go backwards and forwards between the two currencies, but NECC will be giving out conversion aids. However, it is important for the public not to round off the conversion to 2.5 euros since this in itself leads to creating inflation,” said Mr Camilleri.

The NECC will also be organising information meetings, he said, and providing training together with an educational campaign targeting businesses. “But obviously, the government will regulate to set a level playing field in the interest of both consumers and businesses.”

Mr Camilleri pointed out that there was still 18 months to go before the introduction of the currency at the earliest possible date of 1 January 2008. “Our intention is to disseminate information in a gradual approach, so that the public gets the right information at the appropriate time – when they need it most. At the same time, through our euro helpline 154, anyone can give us a call and our team of information officers will be very willing to answer any queries.”

He made an important point: “We are changing our money and not our prices. The euro is not a tax or anything. Were it an increase in VAT, then yes, one would expect price increases, but this is nothing of the sort.”

The dual pricing issue is another one that seems to be causing confusion, and Mr Camilleri explained that it is, in reality, quite simple and a straightforward aid to consumers.

“There are a number of factors that favour dual pricing. The concept is accepted by all. It’s the date that’s a bone of contention. But why is dual pricing necessary?

“The simple answer is that it leads to price comparability. You can look at prices on the same level. You can’t have a situation like we have today, where different shops offer different euro prices for the same item. Take a carton of milk. Why should I find different euro prices for cartons of milk in different places?

“With dual pricing, this will automatically be removed. You will be able to expect the price to be the same everywhere. But at this point in time we cannot enforce anything, which is why we need the Euro Adoption Bill to be enacted in parliament as soon as possible and before the summer recess.”

Mr Camilleri explained that, at present, the euro is still a foreign currency, meaning that a shop owner accepting euros incurs commercial and bank charges for conversion.

He said that the general public seemed to be in favour of the euro currency, and while he realised that people were not yet well informed, the way forward had to be timely information.

“Another issue is that some people seem to think that they will have to pay to get their money changed to euros, but this is not the case. There will be an overlap period where you can change any amount of Maltese lira into euros at no cost, so there is no reason to panic. At this point, if you change currency, you will be on the losing end, whereas if one waits for the period of free convertability of cash there are no risks of currency losses.”

He said that once the euro becomes legal tender, and even for brief period before 1 January 2008, bank charges will be waived and people will be able to deposit, convert or do whatever they like without incurring charges.

Mr Camilleri also pointed out the practical aspects of the euro currency. “Apart from the given thing that you can travel anywhere in the eurozone with one currency, the euro is the second largest currency in the world. For example, if you went to Japan with Maltese lira it would not be recognised, least of all accepted, whereas presenting euro will in all probability lead to it being accepted for a sale,” said Mr Camilleri.

He said that while the Malta currency was stable, it was not a world class currency. “We are joining the bandwagon, joining a solid international currency that is stronger than sterling at no extra cost.”

Mr Camilleri said that interest rates will also be more favourable. “Today, many people live on credit, whether it is a house or personal loan, flexi-credit or an overdraft. Interest rates will be slashed. You have to remember that in order to maintain our currency’s strength, interest rates are currently 0.75 percentage points higher than ECB rates on the euro. This discrepancy will automatically be removed. Obviously, the interest on your savings will go down, but nowadays people do not invest in their savings account. The net benefit far outweighs the potential losses.”

Fear of change is accepted by the NECC. “Humans are creatures of habit. But there are so many benefits. We need the right attitude. I think the relative majority are in favour of introducing the euro. But people are a bit apprehensive of the side effects, though. There is no strong disagreement in principle. We have to explain what the opportunities are.”

Mr Camilleri said that there might be short-term pain, even that of the inconvenience of swapping currency. “The biggest challenge is getting your head round it, for example understanding the value of what is in your pocket. One pound in my pocket is one thing, but what is one euro? You have to work backwards. It’s basically calibrating our minds to a new value structure,” he said.

Joining the eurozone means meeting the Maastricht criteria of having a budget deficit of less than three per cent, but countries must stay within these criteria or face stiff fines. Mr Camilleri explained: “The euro will necessitate that the country does not operate a budget deficit of more than three per cent of GDP. It’s not an issue of just meeting the Convergence Criteria, and that’s it. We need to sustain it. The country needs a long-term prudent fiscal and economic policy. And a better economy brings about better wages, more jobs, more spending power, better working conditions and better productivity across the board.”

Mr Camilleri and the NECC believe that adopting the euro will have a positive effect on investment. “A potential investor would look at Malta and his first thought would be to assess the economic situation. At the moment we seem to be coming out of an economic slumber. We are getting there but still have a long way to go. Economic performance is crucial to the mind of an investor.”

He said that when Malta joins the eurozone, exchange rate risks will be eliminated and although the government has made clear its intentions not to devalue or appreciate the lira, this risk will also be eliminated, as monetary policy is determined by the ECB for the whole block. This means more stability for investors.

“We might experience an initial short period of contraction in consumption, when people reduce spending while getting used to the currency, then once they get used to it, activity should pick up.”

During the actual changeover period, the Central Bank of Malta will be siphoning off Lm500 million in Maltese lira notes and coins in circulation and pumping in its equivalent in euro – the logistics, he said, are massive.

It was very important, said Mr Camilleri, for people to get the right information about the euro, and the best source is the NECC. “We want people to get in touch with us and that’s the reason we have recently launched the 154 information line. We will be out and about and even in the media, but people should contact us if they need any information.”

He said that Malta was not reinventing the wheel and had the advantage of liaising with Slovenia, who are due to change currency next year. “We can learn from the process of other countries. We are monitoring Slovenia, we are learning from their experience and hopefully we can do better than them, and then people might watch us and learn from us and in turn do a bit better than us,” Mr Camilleri concluded.

Fact:Malta will be receiving a total of 43 million euro notes worth e875 million and 108 million euro coins worth e21 million.