michael c bonello : the euro and beyond welcome address by mr michael c bonello, governor of the central bank of malta, at the conference “ emu governance and euro changeover – malta on the path to the euro ”, valletta, 1 october 2007. * * * prime minister, president of the european central bank, mr. jean - claude trichet, commissioner for economic and monetary affairs, mr. joaquin almunia, excellencies, distinguished guests, ladies and gentlemen, malta ’ s forthcoming adoption of the euro represents the final step in the country ’ s integration in the european union ( eu ) and is clearly a major milestone in its economic history. the presence here today of such a distinguished gathering indeed testifies to the importance of the occasion. i therefore would like to start by joining the prime minister in extending a warm welcome to president trichet, commissioner almunia and our other guests from abroad, including the governors and other senior officials of twenty - two national central bank members of the european system of central banks. reaching this milestone has by no means been an easy task. at the level of macroeconomic policy, difficult decisions were called for, and taken, to start addressing existing imbalances and other impediments to growth in order to satisfy the maastricht criteria. as for the logistics involved in preparing for the change of currency, a wide - ranging effort has been undertaken during the past two years to mobilise both the public and private sectors and to coordinate preparations at a national level. it is, therefore, appropriate on this occasion to acknowledge the valuable work carried out by the national euro changeover committee and its steering committee. i would also like to pay tribute to the staff of the central bank of malta for their contribution in preparing the bank for its role as a member of the eurosystem and in planning and executing the currency changeover. during more than two millennia the maltese people have used many different currencies in circumstances often dictated by the changing balance of power in the mediterranean, and reflective of malta ’ s status as a dependency of some larger and more powerful nation. the adoption of the euro, however, is a change of currency with a difference. this time it will occur because malta, out of its own choice, will join fourteen other sovereign member states of the eu in an economic and monetary union designed to complement the single european market, a venture that could rightly be described as an epoch - making development in the

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