to the euro, either before or on the day of entry. let us assume the maltese lira peg to the euro is increased from 70 per cent to 100 per cent before entry. the same principle that applied to past revisions to the exchange rate basket will apply on this occasion, too. when the currency basket was last updated, in august 2002, the value of the lira was derived on the basis of the old basket, which at the time was composed of currency portions representing the euro, with a 56. 8 per cent weight, sterling with 21. 6 per cent and the us dollar with 21. 6 per cent. the revised weights - 70 per cent euro, 20 per cent sterling and 10 per cent us dollar - were used to derive the new currency portions and produced the same value for the maltese lira as under the old basket. in the same way, the switch from a 70 per cent peg to a 100 per cent peg will not entail a change in the level of the lira / euro rate from that prevailing under the current exchange rate regime. i hope this will correct the impression some people have that the peg to the euro will automatically result in a change in the value of the lira beyond the normal day - to - day market movements currently observed. the other step concerns the choice of the central parity rate for entry in erm ii. as explained earlier, this, however, remains a multilateral decision to be taken by consensus and the matter, therefore, is not at our sole discretion. what are your expectations with regard to the central parity rate? as i have just pointed out, exchange rate stability is vital for our open economy and we wish to preserve this important feature of the currency during erm ii. we have reason to believe that this is not an unrealistic expectation. it is based on the outcome of a study the bank carried out on the equilibrium exchange rate. according to economic theory, the central parity rate in erm ii stands a better chance of being sustainable over the two - year period if it corresponds to the equilibrium exchange rate. thus, if one could identify the latter rate, one would automatically have an idea of the most appropriate central parity rate for erm ii. the equilibrium rate, however, is not specifically known and cannot be observed. it can only be estimated under a number of assumptions and the estimates are sensitive to the methodology used. recognising this caveat, the bank used several methods to

##tracted recession may also reduce the potential labour force by discouraging vulnerable workers from seeking a job. this effect is again not independent of policies, since there might be social and financial incentives to stay away from the labour force, and the development in the past of early retirement schemes for older workers subsidised by governments in some countries is a good example. overall, looking at the research published, three elements of the labour market institutional setting seem particularly worth looking at as possible determinants of the different outcomes across countries : first, the legislation on types of employment contracts and unemployment protection schemes ; further, the institutional design of collective bargaining ; and finally, active labour market policies and labour market intermediation mechanisms. these three elements broadly correspond to the current structure of this seminar, and will therefore be treated in one way or another. let me conclude with two final points on the link between labour market reform and other policy measures. first, labour market reform is also the best case where the complementarities with the exit strategies needed are most obvious. if we take the spanish case as an example, we can see that unemployment benefits amounted to around 3 % of gdp in 2009. and the employment losses associated with this increase in unemployment have also had a significant negative impact on public revenues. thus, a non - negligible part of the huge increase in the deficit in the past two years is directly or indirectly related to labour market trends. preventing this increase in unemployment from becoming structural would greatly smooth the fiscal consolidation process. that leads to me to emphasize a second point : it is important that different reforms should be pursued in unison, and in particular that labour market reforms be accompanied by product and services market reforms. in this regard, it is vital to push through structural reforms providing for the elimination of obstacles to effective competition and of those that may hamper the reallocation of productive resources. indeed, only with competitive and flexible product and services markets, would labour market reforms translate into higher activity and employment rather than higher rents. also this broad comprehensive reform approach can help create the consensus that is needed for reform, as different actors perceive more clearly the benefits of a comprehensive reform package, and not only the costs to them of specific reforms. some good examples of the benefits of this comprehensive approach are denmark or the netherlands, countries that adopted a mix of labour market, public finance and product market reforms that complemented and reinforced one another. i do not want to take up any more of your time with these