The significance of having as our own the world’s second most important currency is not lost upon a central banker. For, beyond its proven economic benefits, the euro signifies the virtual elimination of the potential risk of an exchange rate crisis to which the currencies of small, open economies are exposed on a daily basis in a world characterized by the free movement of capital. We have now traded in this vulnerability for the greater security and credibility afforded by a major international currency. The euro has indeed been a success story in many respects. The disciplines of Economic and Monetary Union (EMU) were intended to promote the creation of a macroeconomic environment in which countries could thrive in an increasingly competitive market place. The euro area’s track record in terms of price stability, trade expansion and employment creation suggest that these expectations have been largely fulfilled. The Central Bank of Malta is, therefore, proud to have become a member of the Eurosystem. From an institution charged with the preservation of price stability in Malta and with safeguarding the integrity of our national currency, the Bank now shares responsibility with the other members of the Eurosystem for shaping monetary policy in the best interest of 320 million people in fifteen countries. This is a task which my colleagues at the Bank and I approach with confidence and enthusiasm. From a national perspective, the challenge now is to maximize the benefits of participation in monetary union by making further progress on the path of reform.
But for this to occur, it will be important for market participants to appropriately discriminate across countries, rather than treating EMEs as a single group. The good news is that many EMEs generally appear to be better equipped today to handle the Fed’s prospective exit from its exceptional policy accommodation than they were during past tightening cycles. This reflects the fundamental reforms that EMEs have put in place over the past 15 years, as well as the hard lessons learned from past periods of market stress. Among the positives are: •  The absence of pegged exchange rate regimes that often came undone violently during periods of acute stress;  •  Improved debt service ratios and generally moderate external debt levels;  •  Larger foreign exchange reserve cushions;  •  Clearer and more coherent monetary policy frameworks, supporting what are now generally low to moderate inflation rates;  •  Generally improved fiscal discipline; and  •  Better capitalized banking systems, supported by strengthened regulatory and supervisory frameworks. Of course, progress has not been uniform across EMEs, and more work remains to further strengthen institutional structures in some countries. In particular, vulnerabilities remain in several important EMEs, and some have been hit by the sharp adverse turn in their terms of trade due to the recent fall in global commodity prices. Still, the fundamental improvements I’ve cited leave many EMEs better positioned than in the past to weather those times in the cycle when the external environment becomes more difficult.