As for the claim that the decision to enter ERM II was hasty and premature, that suggests recklessness! No, there was no rush. The decision was made after thorough consultations with the EU Commission and the European Central Bank (ECB) in the light of the progress achieved by Malta in fiscal consolidation and structural reforms. Their agreement was contingent on a firm undertaking by the Maltese authorities to continue to implement the Convergence Programme. A related objection is that before adopting the euro Malta should first satisfy tests similar to those set for the British economy by Chancellor Brown. This argument betrays an insufficient familiarity with the Chancellor’s five tests. They are, in fact, not so different from the Maastricht criteria, which Malta, together with the six other new Member States currently in ERM II, is seeking to satisfy. The five tests relate to convergence (like the Maastricht criteria); flexibility of labour, product and capital markets (being addressed in Malta’s Convergence Programme); investment, i.e. whether euro will encourage more inward FDI (the British Treasury’s 2003 report suggests that it does); financial services (this applies to the special case of the City of London); and growth, stability and employment. Malta’s strategy document, published jointly by the Government and the Bank last year, argues that the euro would be beneficial in this respect (and so does the Treasury report). The case for adopting the euro sooner rather than later is set out in the strategy document.
For example, a higher deficit means an increase in the public debt of equal amount, and thus more annual interest to be paid out of recurrent revenue. Besides, for the reasons I gave earlier, a higher deficit translates into a wider trade gap (by an estimated Lm7.5 million in the above example). Proponents of more government spending should also bear in mind that even in the absence of the euro adoption factor, Malta would still have to abide by the Stability and Growth Pact (SGP). You might recall that even the British Government, which has no immediate plans to adopt the euro, was called to order by the EU Council some time ago because of its growing budget deficit. Then again, sound public finances are fundamentally a matter of economic common sense and prudence. So much so that in recent years there have been repeated calls on the government from all quarters to reduce the deficit and the public debt. Is it not strange, therefore, that just when headway is finally being made in this very direction, we hear calls for a reversal of this policy and for engineering what would at best be a short-term boost to growth? One should also bear in mind that Malta’s main challenge is to become more internationally competitive. In this respect, an increased fiscal deficit will not solve anything. Malta needs quality growth, preferably resulting from foreign direct investment, which brings with it capital, technology and markets.