Out of the 11 EU member states lined up to join the euro, only Malta and Cyprus will reach the fiscal criteria to join by 2008 while Slovakia appears on track to sign on to the single currency the following year, a report drawn up by Credit Suisse found out.
The study, European Monetary Union – The Euro’s First Steps into the East, however, found that the other eight euro adoption hopefuls – Poland, Hungary, the Czech Republic, Latvia, Lithuania, Estonia, Romania and Bulgaria – “will probably be waiting for the euro until the next decade”.
The Credit Suisse Economic Research Group describes Malta as a “struggling economy pinning hope on the euro” and stipulates that certain hurdles will need to be overcome along Malta’s road to adopting the single currency. Cyprus, meanwhile, was deemed the most ready to adopt the euro.
The report noted that Malta at present meets only one convergence criterion, that of long-term interest rates, but added that by mid-2007 the correct legislative framework and exchange rate stability should be in place, while the Maltese lira will have completed its two-year stretch in the ERM II in May.
The report also noted how underlying inflationary pressures are subdued and “in the absence of a renewed rise in energy prices the headline inflation should continue to recede”.
Following this week’s meeting of the EU’s Economic and Financial Affairs Council, Prime Minister Lawrence Gonzi expressed confidence that Malta will be adopting Europe’s single currency on 1 January 2008 as planned. He added that all that is left is for Malta is to review its inflation figures for December and January before filing its application to enter the eurozone.
The Credit Suisse report also noted that the budget deficit, which had hit an “exceptional” 10 per cent of GDP in 2003, had dropped below the three per cent threshold last year and that it is projected to decline further this year. It also noted that public debt is “now receding rapidly” from its peak of 75 per cent of GDP in 2004.
On the general economy, the report pointed out how, after growing by a “lively” 4.25 per cent annual rate over the second half of the 1990s, with a comprehensive programme of liberal reforms providing a stimulus, “the economy has languished in the current decade” and that “the ground won before has been lost again”.
Early in the current decade, the report observed, the two main export-oriented sectors, semi-conductors and tourism, were badly hit by the bursting of the technology bubble and the geopolitical tensions in the Middle East.
“The openness and small size of the Maltese economy meant that these blows were particularly disruptive and the budget and current account deficits ballooned,” the report notes.
Since then “intense competition from low-wage emerging countries has made for a difficult recovery” and has left the clothing and tourism industries suffering.
The report on Malta concludes: “Hope is now pinned on the stability provided by eurozone membership and a further round of reforms. The European Commission expressed reasonable optimism that Malta would pass the convergence requirements when the application is made towards mid-2007, even indicating readiness to delay the assessment to allow more time for inflation to decelerate. It also commended Malta’s currency changeover plan.”