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

iemed forum the mediterranean economies in a changing world lessons learned in economic and financial instability : what scenarios can we envisage? the role of central banks at present. monetary policies and exchange rates in the mediterranean countries address by dr mario vella governor of the central bank of malta barcelona, 24 february 2017 dear governor linde, dear fellow governors, ladies and gentlemen, thank you for the invitation to participate in this forum on monetary and exchange rate policy in mediterranean countries. the central bank of malta is both a mediterranean central bank, which once pursued a monetary policy regime similar to that followed by many mediterranean central banks today, as well as a member of the eurosystem. since january 2008, when malta adopted the euro, the central bank of malta is an integral part of the eurosystem. this comprises the european central bank and the national central banks of those eu member states that have adopted the euro as their currency. for us, therefore, our monetary and exchange rate policy is that of the euro area as a whole. the primary objective of monetary policy in the euro area is price stability. 1 the governing council has defined price stability as an average annual rate of inflation of below, but close to, 2 % over the medium term. this focus on price stability is based on the knowledge that money is neutral in the long run, meaning that it can affect nominal variables, such as the price level or the exchange rate, but not real variables, such as income and employment. it also reflects the historical experience of many countries, which clearly shows that inflation is ultimately a monetary phenomenon. the existence of a single currency, the euro, entails a single exchange rate. this has both internal and external implications. from an internal perspective, the single exchange rate means that the euro shields its member countries from exchange rate volatility between them. indeed, the desire to eliminate such volatility was one of the main driving forces behind the creation of the euro itself. prior to the existence of the see european central bank ( 2011 ) the monetary policy of the ecb. euro, exchange rate arrangements in europe were subject to the risk of destabilising currency crises. this instability was seen as incompatible with the existence of a single market and an integrated european economy. 2 from an external perspective, like most major currencies, the euro is a freely floating currency. the external value of the euro is determined by the interaction of demand and supply in the foreign exchange market. of course, the