michael c bonello : the adaption of the euro welcome address by mr michael c bonello, governor of the central bank of malta,, during the concert held to mark malta's membership to the euro area on saturday, valletta, 12 january 2008. * * * you have joined us here today to mark a major milestone in our country ’ s economic history. during more than two millennia the maltese people have used many different currencies in circumstances most often reflective of malta ’ s status as a dependency of some larger and more powerful nation. the adoption of the euro, however, is a change of currency with a difference. this time it has taken place because malta, out of its own choice, has joined fourteen other sovereign member states of the eu in an economic and monetary union designed to complement the single market, a venture that could rightly be described as an epoch - making development in the history of our continent. for malta, as for the other new members of the euro area, the euro offers the prospect of enhancing the economy ’ s potential to grow faster. the elimination of exchange rate risk and currency conversion costs should result in increased trade, while the low interest rate and inflation environment of the euro area should make for reduced business costs and greater macroeconomic stability. combined with the fiscal discipline associated with monetary union, this should translate into higher credit ratings and improved investment prospects. the significance of having as our own the world ’ s second most important currency is not lost upon a central banker. for, beyond its proven economic benefits, the euro signifies the virtual elimination of the potential risk of an exchange rate crisis to which the currencies of small, open economies are exposed on a daily basis in a world characterized by the free movement of capital. we have now traded in this vulnerability for the greater security and credibility afforded by a major international currency. the euro has indeed been a success story in many respects. the disciplines of economic and monetary union ( emu ) were intended to promote the creation of a macroeconomic environment in which countries could thrive in an increasingly competitive market place. the euro area ’ s track record in terms of price stability, trade expansion and employment creation suggest that these expectations have been largely fulfilled. the central bank of malta is, therefore, proud to have become a member of the eurosystem. from an institution charged with the preservation of price stability in malta and with safeguarding the integrity of our national currency, the bank now shares responsibility with the other members of

financial crisis in sweden and those in mexico and southeast asia. in recent years the situation in sweden has become more stable and, with a resolute economic policy, developments have taken a positive turn. the bank crisis has been resolved, the economy is in an expansionary phase and inflation expectations are low. step by step, the credibility of the new regime is being established. experience in other countries clearly shows that the consolidation of a changeover to a low - inflation regime takes many years. inflation target ’ s historical roots and advantages the idea of focusing monetary policy on price stability goes back, as i mentioned earlier, at least to wiksell ’ s arguments a century ago. it seems to me that wiksell ’ s emphasis on deflation being as important to avoid as inflation has much to do with the acceptance of this policy today. in sweden and many other countries, the old idea, in the 1950s and 1960s, that a trade - off exists between inflation and unemployment resulted in an increasingly high level of trend inflation. when the drawbacks of active economic policies of this type became apparent, people in general and their representatives also feared the other extreme - a monetary policy that consistently aimed at keeping inflation as low as possible. some countries, of which sweden is one, are basically averse to deflation. so a regime whereby monetary policy has a systematic, long - term commitment to keeping inflation at a predetermined level of 2 per cent, neither more nor less, represents what many people perceive as a balanced approach to avoiding deflation as well as inflation. this has made it easier to establish the legitimacy of the regime in the public mind. some relevant issues for a practitioner let me now turn to some matters which a practitioner finds important and which will also be touched upon during the coming two days. one issue concerns the indicator of inflation that is appropriate to use as an explicit target. the practical considerations in this respect are complex and are currently being debated in sweden. the consumer price index has the advantage of being familiar to a wide public. besides measuring trend inflation, however, it also gives information about price fluctuations that stem from transitory supply - side shocks, for example changes in indirect taxes and interest costs. with the cpi as the target variable, the central bank encounters problems in the public discussion because shocks of various kinds are liable to result in temporary deviations from the target. if some indicator of underlying inflation is targeted instead, however, it is likely to be relatively unfamiliar to people