is because the euro offers the prospect of being anchored in the relative safety of the world's largest economy. this would not only mean reduced exchange rate risks and less uncertainty for maltese economic agents and their foreign business partners but it would also eliminate the need to maintain higher interest rates to compensate for the element of risk associated with the small size of the maltese economy. the latter, moreover, would be of direct benefit in terms of price competitiveness, as would be the reduction in currency conversion costs and the increased price transparency. our assessment also shows that malta is well suited to participate in the euro area. its economic structure bears a fair degree of similarity with the euro area and both trade and financial linkages are substantial. furthermore, the lira is already closely linked with the euro so that joining the euro area does not entail a radical change in the parameters applicable to macroeconomic policy setting in malta. at the same time, most of the formal requirements for entry, with the exception of the criteria on public finances, have been, or stand a good chance of being met on a sustainable basis. as far as public finances are concerned, moreover, the fiscal consolidation process is on schedule, as the eu council has acknowledged, with the target deficit / gdp ratio for 2004 achieved. a positive track record of exchange rate stability has meanwhile cultivated expectations abroad that malta will not remain outside the euro area more than is necessary. a delay would thus send the wrong signals to international investors and could well reverse the upgrade in malta's credit rating as this was partly a response to expectations that malta would proceed with economic reform at a steady pace to adopt the euro as soon as conditions allowed. delaying euro adoption would thus not only postpone the benefits of the single currency but could also place malta further behind the other new member states, many of whom are expected to have adopted the single currency by 2008. three of them, in fact, have already joined erm ii and could be candidates for euro adoption as early as 2007. what is erm ii and what is the rationale behind it? erm ii is an arrangement in which a formal rate of exchange is established between the euro and the national currency of each participant in the mechanism. this rate is called the central parity rate. the rules require that at the time of entry, the lira is fully pegged to the euro. this means that the current peg to a three - currency basket, in which the euro carries a 70 per cent weight, will

michael c bonello : interview with the times interview with mr michael c bonello, governor of the central bank of malta. this interview was published in the times on 26 march 2005. * * * the cabinet recently discussed malta's approach to the euro and the prime minister has declared that a decision about erm ii might be taken soon. the times caught up with the governor of the central bank of malta, michael c. bonello, and asked him to explain some of the central concepts involved and how events are likely to unfold in the coming weeks and months. it is almost a year since malta joined the european union. the next step for the new member states is the adoption of the euro. two cabinet meetings were held recently to discuss malta's strategy in this regard. what role do these meetings play in the overall preparatory process? the obligation to adopt the euro reflects the important role the single currency has come to play in what the eu is today and in what it is set to become in the future. as a minimum, by significantly reducing transaction costs and exchange rate risk, the euro facilitates progress towards the completion of the single market. this expectation is supported by the conclusions of academic studies which suggest that a currency union results in approximately a doubling of trade. the treaty, however, does not set a target date for euro adoption. that date is, to an extent, at the discretion of the national authorities. this approach builds on the premise that the considerable benefits of a currency union can only materialise when a close similarity exists with other euro area participants and a high degree of convergence has been attained with them. when this point has been reached, a prospective new member is much less susceptible to shocks which are not common to other members. this ensures that the monetary policy of the european central bank ( ecb ) is equally suitable for all euro area members - old and new. the two cabinet meetings held recently assessed malta's state of readiness in this regard, on the basis of a report prepared jointly by the central bank of malta and the ministry of finance. the meetings also discussed issues related to malta's participation in the exchange rate mechanism, also known as erm ii. the first decision which has to be made in fact concerns the timing and method of participation in erm ii because a member state cannot adopt the euro without having successfully spent a minimum period of two years in this mechanism. while this decision is taken in a multilateral context involving various eu authorities, member states