Responses by the Maltese Parliament to a questionnaire on the euro show an alarming number of ‘Don’t Knows’ to the questions asked.

The responses by the national parliaments of the 27 member States are publicly available following the holding of a special seminar for MEPs and delegates from the national parliaments held last week in Brussels.

Summing up the two days of debate with members of the European and national parliaments, Economic and Monetary Affairs Committee Chair Pervenche Berès (PES, FR) said it was clear that having a single currency did not of itself do away with economic divergence between member States. There was a need, she said, to strengthen the eurogroup and improve the economic pillar of Economic and Monetary Union. “When it comes to international bodies, national parliaments and the European Parliament should work in tandem. The accountability of national representatives in such bodies is a vital question for our democracies,” she said.

The meeting was also addressed by Nobel Prize winner Joseph Stiglitz (Columbia University) who told the MEPs and MPs that economic globalisation had gone much faster than political globalisation. While Europe was not a major cause of the problem – large US trade deficits and borrowing while Asian countries had trade surpluses and huge dollar reserves – it would be adversely affected by an abrupt correction of the imbalances.

The following is the questionnaire as answered by the Maltese Parliament.

1. a) What is the assessment of your Chamber on the situation regarding economic divergence and convergence in the macro- and microeconomic field in the euro area economy, both before and after establishment of the euro?

The extent to which the creation of the euro area has led to more economic convergence has been extensively researched. However, there does not seem to be any clear conclusions emerging from this body of literature. Our assessment indicates that although the level of convergence or divergence differs across member States, in general the euro leads to higher convergence between member States. This is conditional on a number of factors, namely the functioning of the internal market and the degree of trade integration together with the functioning of the product, labour and capital markets.

1. b) Regarding the non euro area countries, how would you assess the performance of your country regarding the convergence or divergence, both prior and subsequent to the introduction of the euro? Does your Chamber have a specific view on how convergence should be increased?

A number of factors have led to further convergence of the Maltese economy. In particular, Malta is very close to satisfying all the (nominal) convergence criteria after having reduced its deficit level below the 3 per cent of GDP target, with the debt to GDP ratio embarking on a downward trend towards 60 per cent. Inflation in November 2006 was below the reference value. Interest rates are also within the reference rate. In the meantime, following Malta’s entry in ERMII, Malta maintained a stable exchange rate with the euro. In addition, a relatively high degree of real convergence was already evident. The euro area remains Malta’s main trading partner and the business cycle in Malta appears to be correlated with that of the EU. Following membership, Malta is now a full member of the internal market. The real effective exchange rate is relatively stable while real interest rates are also close to euro area levels. The labour market in Malta is also relatively flexible as are prices and wages.

Meanwhile, capital markets have also been liberalised and foreign direct investment remains a major source of investment. Financial markets are properly regulated with financial services considered as one of the fastest growing industries in Malta. The structure of the economy is also very similar to that prevailing in the EU except for higher reliance on tourism.

All these factors should ensure that following the adoption of the euro, Malta continues on the path of convergence to the euro area. However, the experience of other member States that have joined the euro area shows that further convergence will not be automatic. In particular, this will depend on the structural reforms that take place and the necessary policy coordination, particularly on the fiscal front. In Malta, efforts are being undertaken in several areas including the surveillance of market structures to ensure that these remain competitive, labour market reforms particularly those encouraging labour participation and enhancing the quality of human resources through training and education, research and development, access to venture capital, fostering entrepreneurship and investment in infrastructure. The structural and cohesion funds available for Malta will constitute an important contribution to meet these challenges. In addition, a stable environment, low interest rates and prospects of higher potential growth rates in the future should mobilise private investment further, including both local and foreign direct investment in the economy.

Maintaining sound and sustainable public finances should also ensure the availability of fiscal policy as an additional demand-management tool, allowing automatic stabilisers to work freely and further enhance economic stability.

These challenges are not exclusive to Malta and at European level structural reforms in the product, labour and capital markets, enhancing the internal market and removing the barriers to competition remain essential in order to achieve the goals of economic convergence.

Solidarity among member States, particularly through the implementation of the EU budget is also essential in order to increase economic convergence. In addition, ensuring economic policy coordination, particularly through the stability and growth pact remains an important element for a proper functioning of the euro area.

2. a) Does your Chamber have a position on the issue of economic governance of the euro area, in terms of how it could be improved so as to enhance convergence?

Malta judges that the current economic governance regime is suitable for the next enlargement of the euro area. New member States are converging their economies closer to those of the older EU member States, thus minimising the possibility of serious divergences in economic policies between individual euro states on one hand and the euro area on the other.

European institutions may however want to reconsider the suitability of current economic governance structures if in future the euro area extends significantly over the medium to long term.

2. b) What are the institutional reforms, if any, currently being discussed in your Chamber to cope with divergence and to improve the prospects of convergence in the euro area as a whole?

No discussions related to institutional reforms necessary to cope with divergence or to improve the prospects of convergence in the euro area have been held.

3. a) Are any strategies currently being discussed in your Chamber to improve at the national level the implementation of decisions such as the Lisbon Strategy and the Integrated Policy Guidelines?

The implementation of the Lisbon Strategy and the Integrated Policy Guidelines have been discussed at parliamentary level. Meanwhile, the NRP has been tabled in Parliament.

3. b) Do you see room for improvement in how the European Parliament deals with the policies aimed at improving convergence with the euro area?

There might be scope for cross-fertilisation of ideas, challenges, opportunities and threats facing individual European economies and the euro area economy, including an assessment of the policies aimed at improving convergence in the euro area and their implementation.

3. c) Do you have any suggestions on how to improve cooperation between the European Parliament and your Chamber in this policy field?

The setting up of inter-parliamentary sub-committees (representing MPs from national parliaments and European Parliament) might serve to increase mutual understanding of challenges and opportunities and on how progress can be achieved on agreed-upon agendas, including the Lisbon agenda.

4. a) What is your Chamber’s assessment, if any, of the role of the euro in an international monetary system marked by strong imbalances?

In contrast to other global regions, the euro area does not have a significant external imbalance. Still, the euro area is not immune to global imbalances and their disorderly correction. Such an event could negatively affect trade through relative price movements particularly exchange rate realignments and asset prices, changes in the net worth of companies through changes in the value of balance sheet entries and changes in global demand. This could also exert a negative effect on business confidence, particularly in the event of a severe contraction in deficit regions.

In the absence of higher savings in the US, further shifts towards domestic-led growth and further exchange rate liberalisation in Asian countries, structural reform in the euro area could help in the rebalancing process. Structural reforms in Europe, including those which reduce rigidities, would boost domestic demand and growth making the euro-area more attractive to international capital flows and possibly help the rebalancing process. This should be associated with the requisite of moving factors from one type of output to another. In addition, this could increase the economy’s resilience to external shocks in the event of a disorderly rebalancing of current accounts.

The euro area ought to show leadership in front of the existing global imbalances in order to promote the euro as a global currency. Further coordination and commitments among euro area authorities in international fora should help in increasing leadership at a global level.

Member States have differed positions which reduce confidence in the euro as a global currency. As a result, the euro does not reflect the economic weight of the euro area in the global economy.

4. b) Likewise, what is its position on the accountability of European representatives in these institutions to the national Chambers and the European Parliament?

We have no formal position on this.

4. c) Is the representation of the euro zone in international financial fora, such as the International Monetary Fund, World Bank, the G7/8 and G/20, in line with its economic weight? How does your Chamber assess, the prospect of improved coordination of euro zone representation?

A coordinated position in international fora is necessary if the euro area is to project its voice on the world economic stage, especially when Europe is being criticised of being partially over represented in international institutions and fora.

Increasing the representation of EU members, which are under represented, in the reforming of shareholding in international institutions would effectively increase the relative weight of the euro area in international fora especially when considering countries currently under represented which are in the process of adopting the euro.