Michael C Bonello: Opportunities and challenges of the euro for business Speech by Mr Michael C Bonello, Governor of the Central Bank of Malta, at the conference The Transition to ERM II, EMU Convergence & EURO Adoption - Implications for Enterprises, organised by the Malta Business Bureau and the Mediterranean Bank Network, Valletta, 15 October 2004. *  *  *  The rationale for a common currency In addressing this topic it is first of all important to understand that the adoption of the euro marks only the last stage in a much broader process which started with accession to the EU. At that point, Malta concurrently joined the Economic and Monetary Union (EMU), but its participation in EMU is for the time being limited. In particular, Malta has not yet entered ERM II. This means that both monetary and exchange rate policy are still under the control of the local authorities. This is in line with the EC Treaty, which confers upon new members the status of Member State with a derogation, allowing them considerable discretion as to how and when they should proceed towards the euro. Such an approach builds on the premise that whereas a currency union offers the prospect of considerable benefits to its members, these can only materialise when a high level of convergence has been reached with the other participants in the union. When this point has been reached, a prospective new member is much less susceptible to asymmetric shocks, i.e.
As Hari Vittas, Alternate Executive Director for Malta’s constituency in the IMF aptly put it during a recent IMF Economic Forum, “The potential benefits of monetary integration may be large, but they are not automatic and can easily be wasted in the absence of good policies.”1 On balance, however, the benefits of participation in the euro area should more than outweigh the costs, such that over a sufficiently long time span the growth potential of an economy should be higher than it would have been outside the union. This expectation is supported by the results of recent research. An extensive study by Andrew K Rose of the University of California at Berkeley, for example, concludes that a currency union results in approximately a doubling of trade. Within the euro zone, moreover, it is estimated that trade volumes have increased by 15 per cent, beyond what can be explained by growth and other factors. Recognizing such benefits of EMU, many credit rating agencies foresee an upgrade in the ratings of those new Member States that are among the first to adopt the euro,2 although they generally emphasize that what matters is establishing a track record with respect to the implementation of reforms, especially fiscal consolidation.3  The broader macroeconomic challenge These observations notwithstanding, premature participation in a currency union is nevertheless associated with some potential pitfalls. These result from the loss of monetary and exchange rate policy as a tool for stabilisation purposes.