. 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

of the remaining levies has led to greater consumer demand for imports, particularly of foodstuffs and furniture. there has also been a surge in foreign travel. in 2004, the number of maltese leaving by air rose sharply by almost 17 per cent, which implied an additional outflow of lm7 million. another factor that has undoubtedly served to encourage consumption, and even possibly investment abroad, has been the relative unattractiveness of the traditionally preferred saving outlet, the 12 - month fixed deposit. the gradual reduction in the central bank of malta's central intervention rate these last years was followed by more than proportionate cuts in the rates offered by banks on fixed deposits, probably because of the abundant liquidity available at the time. in today's tighter liquidity conditions, a 12 - month fixed deposit rate of about 2. 6 per cent may now be considered inappropriate. while the impact of these behavioural shifts on the balance of payments is likely to stabilise over time, the bank is nevertheless concerned about the apparent imbalance between spending and saving patterns and will be monitoring developments much more closely. there were other reasons behind the fall in the bank's external reserves in recent months. one such factor has been the sharp increase in the oil import bill, particularly since the second half of 2004. at the same time the reserves were also affected by weak export prices, most notably for electronic components. thus, even though export volumes increased, the value of exports was lower during 2004. consequently, sales of foreign exchange in the form of export proceeds by commercial banks to the central bank of malta were accordingly lower. the bank also carried out some large transactions on behalf of the public sector, mainly for the purchase of infrastructure - related capital equipment. after all these movements, the bank's reserves remained at a comfortable level of lm856 million at the end of january. i should also point out that the bank's reserves had been rising steadily over the last three years and this has led to high levels of liquidity in the banking system. in line with its monetary policy objectives, the bank has been forced to absorb this liquidity through open market operations. consequently, a reversal of the upward trend in reserves and in bank liquidity was expected as the relatively low level of domestic interest rates inevitably induced some restructuring of the banks'investment portfolios. as a result, the level of foreign assets in bank portfolios increased. so that, while the central bank of malta's reserves