Some 10 days ago, when the international rating agency Fitch expressed its opinion that, due to persistently high inflation, Malta would more likely qualify for the adoption of the euro in 2009 rather than 2008, the silence from government was deafening. NET TV, which would normally beam the tiniest of good economic news emanating from reputable rating agencies such as Fitch with glee, reported absolutely nothing. The fact that the government has attempted to brush aside such a relevant opinion only confirms my suspicion that the risk this may indeed happen is becoming ever more possible. Should we be worried?
The answer to that question depends on whether one is concerned about the economy (which is what really matters) or the government’s political credibility (which is really of little importance). On a political level, the government should be worried, the Prime Minister in particular. If Malta doesn’t manage to adopt the euro in 2008, the government will lose face. Tough luck, Dr Gonzi! After all it was you who, together with Dr Sant in Budget 2005, politicised the euro issue by waving a two-lira note (like you were selling Super 5 tickets at City Gate) and asking Dr Sant what the currency would be worth should the latter end up in Castile. That day the Prime Minister managed, once again, to split Malta roughly down the middle; Nationalists were now branded pro “euro”, Labourites “euro” doubtfuls. The “euro”, like EU accession, just couldn’t be a national project. It had to belong solely and exclusively to the Nationalist Party. If you fail in this task, Dr Gonzi, the failure will be yours alone!
The Greens have long held the opinion that the euro is in Malta’s national interest. We have further made a commitment not to politicise the issue, although we have and will continue to contribute critically but constructively to the debate. What if we don’t make it then?
Should we not make it by 2008, it really is no cause for great alarm. No business enterprise, local or foreign owned, will shut its doors as a result. Nobody will be made redundant because Dr. Gonzi missed his chance to brand himself “Father of the Euro”. The European Union will neither fine us nor scold us. It will only refuse our request to adopt the common currency and request that we present a new plan for its adoption. Our deadline for adoption is our own to decide. Poland, to take perhaps the most extreme example, has set the target date for 2014!
If we fail to make it, it would most probably be because we would have failed to meet the inflation criteria. In all fairness to the government however, inflation is the adoption criteria that is the most difficult one for any government to control, certainly in the short term. The age of price controls is, thankfully, over.
While Tonio Fenech’s explanation that the increase in inflation is due to the rise in energy prices is technically correct, it is politically incomplete. Oil prices have risen in every EU country not just in Malta. The reason our inflation has risen more steeply than that in other EU countries is because the increase in the price of imported oil in Malta translates into a proportional increase in the price of fuel and electricity, since we are almost 100 per cent dependent on oil. In other EU countries like Finland and Denmark, where alternative energy use accounts for over 20 per cent of total energy, the price of energy did not need to be increased by 65 per cent. Consequently, when in 2005 Malta registered inflation of over 3 per cent, Denmark and Finland registered inflation of 1.9 per cent and 0.9 per cent respectively. In reality, we might fail to adopt the euro not because the price of oil shot up, because it shot up for everyone. We might fail because we don’t have an alternative energy policy!
Missing the euro in 2008 will lead to some economic and financial costs. Businesses would have to continue bearing the costs and risks associated with currency exchange, as well as incurring borrowing costs that are marginally higher than those incurred by other businesses in the euro-zone. The inability to compare prices seamlessly, particularly for our tourists from countries in the euro-zone, would still remain an issue. Individuals with personal loans will miss out on the opportunity of having the interest rate on their loans lowered to levels paid on euro-denominated debt. The commercial banks will not be unhappy that we will not adopt the euro in 2008, because they can continue making mega-millions on currency exchange. On the other hand, the Central Bank may have some difficulty managing our currency, particularly if the failure to adopt the euro in 2008 results in any capital flight, although I doubt this will happen to any great extent. Are these costs high?
Well it all depends on how long after 2008 we will have to wait to adopt the euro. It is not a given that should we fail to make it in 2008, then entry in 2009 would automatically be guaranteed. All four criteria need to be met – the EU Commission is very particular on this. What must be clear even from now is that, irrespective of who sits in Castile after 2008, the euro will be our currency, our common economic destiny. There is no opt-out clause on this one, although we have discretion on the timing of adoption.
In our strongly polarised political environment, the biggest risk that remains is that the timing of euro-adoption (should we fail in 2008) becomes the shameless political battleground on which the Nationalists and Labour fight the next election. The Greens will steer away from such irresponsible behaviour. We recognise how perilous the excessive politicisation of the euro-adoption process would be to our economy. We can only hope that, when the time comes, our political adversaries do as much.
Edward Fenech is spokesperson on finance, the economy and tourism of Alternattiva Demokratika – The Green Party