the erm ii period. this would ensure continuity and so assure operators that stability would continue to prevail notwithstanding the lira ’ s participation in a mechanism that permitted relatively wide daily fluctuations. this decision was also dictated by the need to counter harmful speculation at the time about the appropriate level of the exchange rate. lessons learned one lesson that could indeed be drawn from malta ’ s experience is that the discipline imposed by the currency peg was probably the factor that contributed most to the relatively smooth transition to euro area membership, not only in terms of the achievement of the exchange rate criterion, but more so because it helped to focus attention on macroeconomic and structural policies. there was, however, one factor that remained constant as the journey to the euro progressed. that was the small size of the economy and, thus, its vulnerability to shocks. this was compounded by the risk of a speculative attack of the currency, given the combination of still weak economic fundamentals and the dismantling of the capital controls regime which had protected the lira for decades. these realities made the transition from a basket peg to a full euro peg even more challenging. the potential exposure to capital outflows was also a source of preoccupation because the bank was aware that the typical malta enterprise. interest - sensitive maltese investor was likely to be attracted by the availability of a wide choice of financial products overseas offering attractive yields. long before eu accession the bank had anticipated this challenge by adopting a sequenced programme of capital account liberalisation to test investor reactions. in fact, capital controls were only fully lifted on the eve of eu membership in 2004. during the experimental phase, the liberalisation of direct investment and other long - term flows preceded that of flows with a shorter maturity. at this time in particular the bank ensured that its policy interest rate contained a sufficient premium over euro rates so as to make maltese lira assets relatively more attractive. as a result, and despite the persistence of a relatively high current account deficit, the maltese lira did not experience undue selling pressures. this was reassuring, but it was not enough. when it was time to decide on the strategy to pursue in erm ii, therefore, the bank only put forward its proposal to eschew the use of the 15 % fluctuation bands after it had carried out the necessary studies to assess the level of the equilibrium exchange rate. these studies, based on different methodologies, showed that the maltese lira exchange rate was not significantly out of

strategy for creating a local prosperity and inclusion using broadband and information technology to attract leading - edge businesses, stimulate job creation, build skills, generate economic growth, and improve the delivery of government services. european commission. 2007. report from the commission - convergence report 2007 on malta, com 258 final, p. 7. generate more value. the ongoing improvement in the quality of the infrastructure and other facilities available to investors has induced many foreign investors to locate, or expand existing operations, in malta and thus take advantage of market access and cost - saving opportunities created by malta ’ s status, first as an eu member state and eventually also as a euro area member. this is reflected in the fdi figures when expressed in terms of additions to the capital stock in any one year. since 2003, for example, the ratio of fdi inflows to gross capital formation was on average 83 %, compared to 14 % in the eu25. in manufacturing alone, since the first year of eu membership a total of 127 new projects or expansions with foreign participation have been approved, with an estimated potential value equivalent to 1 % of nominal gdp. 6 the role of the central bank of malta the central bank of malta has been present at every stage of malta ’ s journey to the euro. in the early years it provided the intellectual underpinnings for the project as well as policy advice. for example, it was at the fore in highlighting the long - term benefits for malta ’ s small, open economy of eu membership and of an early adoption of the single currency. it also cautioned, however, that these benefits would only materialise if the existing macroeconomic imbalances were addressed through the implementation of appropriate reforms. the bank also emphasized that these reforms were not only necessary to ensure eligibility for adopting the euro, but also in view of the strong competitive pressures that were emerging in the global economy. on the operational level, the bank ’ s monetary policy remained oriented towards delivering a low and stable level of inflation. the fixed exchange rate regime has indeed been a cornerstone in the country ’ s euro adoption strategy. the policy discipline it promoted had served the country well for over three6 decades as it had come to be recognised that imbalances and structural deficiencies must be addressed through targeted reforms and not through exchange rate adjustment. when, therefore, the time came for the maltese lira to enter erm ii in may 2005, the bank ’ s advice was that the exchange rate should remain fixed throughout