These advantages are an inevitable outcome of the presence of a large number of market participants and the further unfolding of the Financial Services Action Plan, which will enhance the tradability of euro assets in the euro area and beyond. Participation in the single currency area provides scope for further cost savings in the form of lower risk premia resulting from adherence to the EU’s strict macroeconomic policy framework. This aspect is particularly relevant in the Maltese context, as the small size of the country and the prevalence of micro-enterprises make the economy highly susceptible to developments abroad. Foreign banks and suppliers seek to cover this perceived risk by building a higher risk premium into the prices quoted to Maltese businesses. The insurance provided by the discipline of EMU, and the high level of intra-EU integration should reduce this perceived vulnerability and, with that, the risk premium. This is conducive to lower interest rates and to access to financing on more favourable terms. A related advantage is the improved marketability and acceptance of collateral. Maltese lira assets are not considered sufficiently liquid by foreign lenders in view of the thinness of domestic financial markets. Many SMEs are consequently either denied foreign financing altogether, or offered prohibitive rates. This constraint should ease considerably with the adoption of the euro, as the redenomination of domestic assets into euro will improve the marketability of the collateral offered by local businesses.
In other words, the single currency will expose the performance of Maltese businesses to a much more detailed scrutiny than they are accustomed to. From a broader macroeconomic perspective, it could also be argued that just as the euro will enable domestic operators to reap the full benefits of the Single Market, a higher level of integration with the EU could also make the Maltese economy more susceptible to developments abroad. This applies in particular to the financial sector. Thus, for example, while participation in European financial markets will present unprecedented opportunities for risk diversification, this also carries with it an increased danger of contagion should weaknesses develop in specific segments of the market. Furthermore, the TARGET payment system will facilitate the transmission of financial risks between different institutions operating within Member States, calling for extreme vigilance on the part of the Central Bank of Malta and the MFSA. While most sectors of the Maltese economy have been exposed to international competition for a number of years now, and while the financial sector incorporates adequate safeguard measures, there is clearly no room for complacency.