. as a result, eu accession should contribute to faster economic growth, leading to an acceleration of the process of real convergence and to a steady improvement in living standards. eu membership also entails a commitment to participate in emu. before accession, malta will, therefore, have to adopt key elements of the acquis communautaire related to emu. this process is well underway. for example, legislation currently before parliament will explicitly make price stability the primary objective of monetary policy, strengthen the legal and operational independence of the central bank of malta and formally prohibit central bank financing of public sector deficits. in practice, the central bank has been formulating monetary policy independently since 1994, using market - based instruments, including open market operations and reserve requirements, which are similar to the ones currently used by the eurosystem. the adoption of the euro would be the final step in a process linking the maltese economy and the euro area. compared to the current regime it offers a number of additional advantages, which are highlighted in the literature on optimum currency areas. specifically, it should reduce transaction costs ; result in lower interest rates in malta ; ease access to the growing european financial market ; and lead to more transparent pricing of goods and services. it should also act as a spur to the integration process with the eu since countries with the same currency tend to trade more with each other. from an institutional point of view, it should allow malta to be represented in the decision - making processes of the european system of central banks ( escb ) that affect it even today. here i would like to support the view put forward recently, among others by governor wellink of de nederlandsche bank, about the need for adequate representation of national central bank governors in the decisionmaking bodies of the escb. their participation confers a degree of legitimacy on the decisions of supra - national bodies such as the governing council, and can improve the quality of the policy debate as well as communications with the public in the various member states. from our perspective, the adoption of the euro should not involve any major regime shift. in fact, since the collapse of the bretton woods system three decades ago, the maltese lira has been pegged to a basket of major currencies. although the composition of the basket has been changed on a number of occasions, mainly in response to shifting trade patterns, the exchange rate was only devalued once, in the wake of the erm crisis in

the autumn of 1992. the fact that malta has successfully maintained a peg for so long suggests that this is a viable exchange rate arrangement. the choice of a fixed exchange rate as the intermediate target of monetary policy was dictated by key characteristics of the economy. first, malta ’ s size implies that it is a price taker on international markets and cannot hope to influence its terms of trade through nominal exchange rate movements. in addition, because of the economy ’ s openness, the conduct of monetary policy has to take the exchange rate into account, whatever the overall policy strategy adopted. in fact, our experience after the 1992 devaluation showed the ineffectiveness of the exchange rate as a policy instrument, given the rapid pass - through from import prices to the general price level, and the consequent loss of competitiveness in export markets. second, the economy is already highly integrated with that of the eu. this is borne out by trade flows, as well as by a comparison of malta ’ s economic structure in terms of the sectoral distribution of value added and employment with that of the union. in addition, differences in productivity levels between malta and the eu in the traded goods sector have been found to be small, which suggests that the balassa - samuelson effect is unlikely to be strong. moreover, economic integration will deepen as barriers to the movement of goods, services and factors of production are removed as part of the accession process. these factors, which attest to a significant degree of real convergence, support an exchange rate regime based on a peg to the euro. empirical evidence indeed shows that the exchange rate peg has been a valuable nominal anchor, restraining price and wage increases. in fact, inflation has averaged just 2. 6 % in the past five years, indicating a considerable measure of nominal convergence with our major trading partners, and with the euro area in particular. by reducing the costs associated with international trade and investment, the peg has also contributed to malta ’ s orientation as an open economy. price stability and openness have been key factors contributing to the country ’ s economic growth record, which averaged 3. 3 % in real terms during the same period. between now and the adoption of the euro, therefore, malta intends to maintain a fixed exchange rate regime based on a currency basket centred on the euro. the central bank is aware that it will have to maintain the peg and manage a smooth transition to membership of the erm and the single currency area in a rapidly changing economic environment.