in access to credit on more favourable terms. some of these benefits will indeed materialise ahead of entry in the euro area. you will recall that in erm ii the maltese lira will be fully pegged to the euro, so that the variability, albeit limited, in the lira / euro exchange rate associated with the fact that the euro has a weight of 70 % in the maltese lira currency basket will disappear. on the other hand, some variability could nevertheless manifest itself to the extent that the currency fluctuates within the erm ii band. the advantages of pegging fully to the euro area should nonetheless be considerable, as the euro area already accounts for more than half of malta ’ s external trade in non - primary products. for the eu as a whole, the share is even higher. this share is set to increase as malta integrates further with the eu and as more of the current non - euro area member states join the euro area. while prospects for the uk ’ s entry in the euro area remain uncertain, the analysis does not change much, as a large number of companies operating in the uk have already switched to the euro as an accounting currency to gain exposure on international markets and to preserve their competitiveness. this trend is set to continue and is likely to spread to other countries as the euro continues to establish itself as an international currency. this means that the local business community could face pressures to make payments in euro even while malta is outside the euro area, acquiring new currency mismatches in the process. there comes a point, therefore, when delaying adoption of the euro results in more pain than gain. membership of the euro area will also present considerable financing opportunities associated with the large size and liquidity of financial markets in euro. businesses will be in a better position to shop around for the cheapest terms and the highest return. these advantages are an inevitable outcome of the presence of a large number of market participants and the further unfolding of the financial services action plan, which will enhance the tradability of euro assets in the euro area and beyond. participation in the single currency area provides scope for further cost savings in the form of lower risk premia resulting from adherence to the eu ’ s strict macroeconomic policy framework. this aspect is particularly relevant in the maltese context, as the small size of the country and the prevalence of micro - enterprises make the economy highly susceptible to developments abroad. foreign banks and suppliers seek to cover this perceived risk by building a higher

on a number of counts, in fact, labour market indicators are already comparable to those of the euro area. the resemblance is not complete, but further progress in this regard is to be expected as public sector employment is downsized further and as the structural reform programme continues to unfold. a similar conclusion emerges from a comparison with the euro area of the structure of the domestic financial sector and indicators of real convergence ; the degree of similarity is already significant, although there remains scope for some catching up with respect to income and price levels. as far as fiscal policy is concerned, this has rarely been used for fine tuning purposes in malta. if anything, the disciplinary mechanisms of emu should serve to reverse the current trend of negative balances, allowing fiscal policy to respond to the needs of the economy and leaving monetary policy to focus more on price stability. as for the exchange rate, by pegging the maltese lira to a basket of currencies, which is recognized as being the preferred regime for a small, open economy, the monetary authorities have long since given up the exchange rate as a tool of adjustment. although the lira fluctuates on a daily basis against the euro and other foreign currencies, it is fixed in terms of the basket. the use of a fixed exchange rate in which the euro is the main reference currency, moreover, already requires our interest rates to shadow those of the euro area. in practice, therefore, malta has already largely relinquished monetary independence, so that entry in the euro area will not represent a major loss in this regard. overall, therefore, the evidence suggests that neither erm ii nor the irrevocable fixing of the maltese lira / euro exchange rate at a later stage involve a radical shift in policy regime. and since the maltese economy already possesses many of the characteristics required for a smooth transition to a complete peg with the euro and full participation in emu, the adoption of the euro does not only carry with it the prospect of substantial benefits, but is also an objective which can be pursued without fear of serious economic repercussions. entry in the euro area, however, is not automatic but is subject to the fulfilment of a number of conditions. in this respect, since the legal, institutional and operational preparations are on track, the only significant challenge is represented by the maastricht criteria. as for the inflation rate and the long - term interest rates, these have generally been within, or close to,