the reference values in recent years. as far as erm ii is concerned, the minimal exchange rate movements observed over the past few years suggest that malta would have kept within a hypothetical erm ii band. the indications are, therefore, that this criterion, too, is achievable. indeed, this should not be any more difficult than the current task of maintaining a hard peg with a currency basket. this leaves the fiscal criteria as the major outstanding problem since the budget deficit is well above the 3 % limit and the debt ratio likewise exceeds the 60 % reference value. the need to curb the deficit is widely acknowledged and is a central objective of the government ’ s convergence programme 2004 - 2007. this is most welcome because progress in the area of fiscal consolidation and structural reforms is desirable not only because of the need to satisfy the maastricht criteria. it is also required to support the exchange rate as long as malta continues to pursue a fixed exchange rate regime. progress in this direction is certainly also necessary if we want to have a smooth passage through erm ii. indeed, the size of the fiscal deficit is a determinant of the degree of exchange rate fixity which a country can afford, and thus also has implications for the width of the band which will apply to the maltese lira in erm ii. on the one hand, malta ’ s successful experience with a peg in terms of price stability, coupled with the importance of exchange rate fixity for a small open economy that is heavily dependent on foreign trade and investment, suggest that it would be desirable if the features of the present exchange rate regime - predictability and stability - were preserved while malta participates in erm ii. on the other hand, the appropriate width of the bands in erm ii is inversely related to the degree of convergence achieved with the euro area, but positively related to the size of the fiscal deficit. whether the continuation of the features of the current regime will remain possible or not, with all the advantages that it brings to the business community, thus depends on the extent of progress with structural reforms and fiscal consolidation. it is, therefore, vital that the reform agenda remains on track. it is in the common interest to ensure that the economy converges faster towards the high levels of efficiency and living standards of the euro area. the business community clearly has an interest in contributing to the achievement of this objective, both by modernizing its structures and operational practices so as to be better placed to seize the opportunities

michael c bonello : eu membership - the challenge of change speech by mr michael c bonello, governor of the central bank of malta, at the conference “ eu accession, one year on - quo vadis malta? ”, organised by the malta business bureau, st julians, 6 may 2005. * * * when i argued the economic case for malta ’ s accession to the eu in november 2002 i described membership as a concrete, long - term response to the challenge of developing a modern economy with the capacity to generate wealth in a sustainable manner. the experience of countries like ireland, portugal, spain and greece showed that the eu had indeed proved to be a most effective mechanism for this purpose. a year after malta ’ s accession it is clear that membership has indeed opened up new opportunities. the economy now enjoys wider access to export markets, increased competition at home and a greater availability of financial resources under eu funding programmes. while it is too soon to draw definitive conclusions, it has become equally evident, however, that the successful exploitation of the single market will depend on our ability to adjust both institutional structures and operating practices to this novel environment and to implement effective competitiveness - enhancing reforms. the intensification of competition in world markets and the growing diversion of both consumption demand and investment to lower - cost countries adds urgency to this challenge. these developments cannot fail to have an impact on the maltese economy given its small size and openness and its position as a price taker in international trade. while exporters are experiencing acute competitive pressures, the magnitude of this challenge from abroad, and the threat it represents for employment levels, has not, however, been adequately reflected in the results of the high - level social dialogue taking place in the country. it is in part for this reason that malta appears less prepared than its competitors to face international competition. against this background i shall review some of the more important changes brought about by eu membership and the attendant opportunities for malta. subsequently, i shall analyse the current economic performance in terms of the country ’ s ability to adjust to, and capitalise on, the new operating environment. finally, i shall outline some policy orientations that could be useful in facing up to this challenge. the consequences of eu membership the main consequences of eu accession for malta can be broadly categorised under five headings. these are : a better access for exports to eu member states and to other countries with whom the eu has negotiated trade agreements ; heightened competition in the domestic