, but also the players in those markets. the technical aspects of escb membership represent a special challenge for small acceding countries like malta. the domestic financial markets in most of our countries are small and less liquid that those of existing eu members, and typically less sophisticated. and yet, upon membership we will be expected to function on the same level as the long - standing and, in most cases, larger members of the system. ensuring that the transition takes place with the least possible disruption has entailed a comprehensive reform of institutions and operating systems. for example, a real time gross settlement payment system ( rtgs ) has been put in place instead of the existing payment infrastructure. the standards of the securities settlement system have been upgraded to a fully escb - compliant ‘ delivery versus payment ’ system, which ensures the risk - free transfer of collateral and, where necessary, of securities. cross - border payment systems have been adapted to ensure that they meet today ’ s ‘ straight through processing ’ standards. similarly, with regard to statistics there has been an overhaul of methodologies and databases. the development of systems capable of delivering the quality - assured statistics necessary for the successful participation in emu has understandably been a priority of the reform process. but the challenge of emu extends beyond the bank ’ s operational framework. for example, while we aim to participate effectively in the operational structures and decision - making bodies of the escb alongside much larger central banks, we only have some 250 people to perform the tasks involved. we are, therefore, undertaking a critical analysis of each of the bank ’ s areas of operation in order to devise ways of coping with the increased workload. the development of new skills in work areas that will become key to the bank ’ s operations as a member of the escb is another objective. the bank ’ s management structure, too, is being reviewed. the policy - making process has been reinforced in order to respond to the growing need to analyse issues and take decisions in a more timely fashion. line management has been strengthened and authority delegated more extensively to allow the managerial and technical staff to dedicate more time to escb - related activities. it has additionally been felt necessary to introduce a more efficient and rapid exchange of information across the bank, particularly information acquired through participation in escb committees and working groups. while it is helping the bank to become a more focused and efficient institution, effective participation in the escb undoubtedly represents a heavy claim on its limited human

the correlation between business cycles is indeed endogenous in a monetary union, as our trade with the euro area intensifies. in addition, differences in productivity levels between malta and the euro area in the traded goods sector appear to be minor, which suggests that the balassasamuelson effect is unlikely to be strong. similarities are also to be found in the financial system. for example, the degree of financial intermediation in malta is comparable to that of the euro area, and the long - term interest rate is well within the maastricht reference value. further evidence that the economy seems well prepared to join a monetary union is the fact that nominal wages have been sufficiently flexible to carry the burden of adjustment implicit in a fixed exchange rate regime. the absence of extended periods of high unemployment in the face of significant adverse developments suggests that labour markets have been able to adjust. indeed, unemployment in malta has been less volatile than in the euro area. the exchange rate peg has also been a valuable nominal anchor, restraining price increases. in fact, inflation has averaged just 2. 4 % in the past five years ( 1. 3 % in 2003 ), indicating a considerable measure of nominal convergence with our major trading partners, and with the euro area in particular. taken together, these features of the maltese economy suggest that the likelihood of experiencing an asymmetric shock is small ; and they lead us to believe that the exchange rate peg provides a suitable framework for joining erm ii and that the country should be able to adopt the euro sooner rather than later. we are also aware, however, that the peg will have to be maintained during the lira ’ s passage through what is essentially uncharted territory. professor eichengreen ’ s words of admonition to last november ’ s east - west conference here in vienna readily come to mind, “ … prescribing bands for the new eu members for an extended period is the worst form of macroeconomic malpractice. bands are fragile and difficult to manage. their fragility is clear from europe ’ s own experience in 1992. ” in order to ensure a smooth transition towards, and through erm ii, therefore, it will be necessary to convince the markets that erm ii is indeed a natural culmination of the lira ’ s currency basket regime. in this regard, given our track record and assuming a strong national commitment to the convergence process, our strategy should also benefit from the added credibility which