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Kurt Sansone
The essential ingredient of politics is timing, said a Canadian Prime Minister once and that is what Parliamentary Secretary Tonio Fenech missed this week when cooking up a speech on the economic and market outlook during a conference organised by HSBC on Wednesday.
When speaking about the adoption of the Euro, Fenech remarked that Malta would have to join the Exchange Rate Mechanism (ERM-II) for a period of two years during which the euro/Lm exchange rate must remain within a specific band.
It was at this point that Fenech went slightly off-mark in his comments, saying that most of the criteria for stability such as the inflation rate and long term interest rate were already satisfied.
On the very same day the EU Commission published its convergence report for all member states outside the Euro zone, which assessed the compliance of national legislations and the fulfilment of convergence criteria.
According to the report, with an average 12 month inflation rate of 2.6 per cent up until August 2004, Malta did not fulfil the criteria on price stability.
It seems the time of delivering the speech, Fenech or his speech-writer were unaware of the Commission’s report conclusions.
Fenech corrected his statement on inflation later on that day in comments he gave to In-Nazzjon on the Commission’s conclusions. Fenech said it was not worrying that inflation was slightly up since in the past it always fell within the required parameters.
It was a minor slip by the junior minister, one that can be forgiven and forgotten. But it’s going to be harder for Government to forget the conclusions of the Commission’s report.
It confirmed what has been known for quite a long time now; Malta fails in four of the five criteria for convergence. The country conforms only in long-term interest rate convergence and fails to meet the criteria for legal compatibility, price stability, government budgetary position and exchange rate.
Government’s budgetary position is probably the biggest hurdle. In 2003 public finances registered a deficit of 9.7 per cent, the second highest of the new member states after the Czech Republic. According to the Maastricht criteria a country has to contain its deficit below three per cent to be eligible for eurozone entry.
Malta also registered the highest public debt, which stood at 71.1 per cent of GDP in 2003.
The situation may get more complicated when Malta decides to join the Exchange Rate Mechanism (ERM II), which is a compulsory two-year period prior to Euro adoption, during which time the country’s currency will be pegged to the Euro.
As things stand, the Lira is pegged to a currency basket composed of the Euro, Sterling and Dollar. The Euro has a weighting of 70 per cent but for the country to join ERM II, the Lira would require a 100 per cent pegging to the Euro.
As yet government has not taken a final decision on when it expects to join the ERM II mechanism. However, Malta may take solace in the Commission’s report in that none of the 10 new entrants or Sweden (which is outside the Eurozone and has similar status to the 10 new entrants) conform to the convergence criteria.
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