decade of its existence, see lorenzo bini smaghi, “ the euro area ’ s exchange rate policy and the experience with international monetary coordination during the crisis ”. speech delivered on 6 april 2009 in brussels. dependence on imported goods to satisfy domestic consumer demand, the peg was also seen as a prerequisite to safeguard domestic purchasing power. 3 throughout its existence, therefore, the bank ’ s monetary policy orientation was always focused on a fixed exchange rate as the nominal policy anchor. when the bank was founded in 1968, malta formed part of the sterling area, reflecting its past as a british colony and its strong ties with the united kingdom. when the bretton woods system collapsed in 1972, the maltese monetary authorities decided to break the exclusive link with the pound sterling and to peg the lira to a trade - weighted basket of currencies. during the 1980s the composition of the basket was revised on several occasions until, in 1989, the number of component currencies was reduced to three, the ecu - which had replaced several european currencies - the pound sterling and the us dollar. in 2002, the weight of the euro was raised to 70 %, while those of the dollar and the pound were set at 20 % and 10 %, respectively. following malta ’ s accession to the european union, in may 2004, the authorities resolved to move swiftly to adopt the euro. a year later, the maltese lira entered exchange rate mechanism mark ii ( erm ii ) with a unilateral commitment by the maltese authorities to maintain its value unchanged at the central parity rate. this central parity rate then became the conversion rate between the maltese lira and the euro when malta adopted the single currency at the beginning of 2008. in effect, malta has moved from a currency union with the pound sterling to membership of the euro area, with a period characterised by a basically fixed exchange rate in between. maintaining an exchange rate peg over such a long time span is hard, though changes to the composition of the currency basket allowed some flexibility. throughout this period, the lira was only devalued once, in 1992, in the wake of the turbulence seen in europe, which saw the pound sterling ejected from the exchange rate mechanism ( erm ) and the devaluation of the italian lira among others. otherwise, the bank ’ s determination to maintain the peg never wavered. we never blinked. the ability to maintain the peg may have been partly due to restrictions

the maastricht criteria. these include convergence of inflation and interest rates, sustainable fiscal positions and exchange rate stability. the exchange rate criterion requires participation in erm ii for a minimum period of two years prior to the adoption of the euro. this is an arrangement whereby the european central bank ( ecb ) and participating national central banks would not allow any currency to fluctuate beyond a given margin from its central euro rate. this margin at present can be as wide as 15 %, but significantly narrower margins are being contemplated, with an often - cited reference value of 2. 25 %. thus, participation in erm ii does not necessarily imply increased currency volatility. indeed the rationale of this mechanism is to test the stability of a currency. as you know, the maltese lira is pegged to a weighted average of three currencies, whose individual exchange rates against the lira can vary. in this regard, it is noteworthy that the fluctuations in the maltese lira / euro rate over the past few years on average have not exceeded 3. 5 %. as for the inflation and interest rate criteria, malta is well within the reference values. the fiscal deficit, on the other hand, represents a significant hurdle as it is currently about double the 3 % of gdp limit. related to the deficit is the size of the public debt, which exceeds the 60 % threshold. the main determining factor in the timing of the adoption of the euro, therefore, is the speed with which fiscal consolidation can be achieved, bearing in mind that the euro area will not technically be in a position to accept newcomers before 2007. if the government embarks on the relatively fast track of fiscal consolidation implied by malta ’ s pre - accession economic programme, we would need to enter erm ii in 2005. should this track be chosen, however, it would be vital that the planned pace of consolidation be maintained. in this way the benefits of an early adoption of the euro would be reaped, and the lira ’ s stay in erm ii would be smooth, with no noticeable shocks in the transition from the current basket system to the single currency. if, on the other hand, there are slippages in the rate of fiscal consolidation, the stay in erm ii would have to be prolonged and the adoption of the euro postponed. this would attract negative attention from the international financial markets, resulting in a reduced credibility of our economic policy and in pressures on the exchange rate and the interest