Exploiting the new market opportunities takes time because institutional structures and  BIS Review 16/2006  1  operating practices need to be adapted. Some of the funds Malta is getting from the EU are being used precisely to strengthen the economy’s export potential. At the same time, it is also true that the EU economy did not grow as rapidly as anticipated in 2005. It expanded by 1.6 per cent, compared with 2.3 per cent in 2004. A higher proportion than ever of consumer demand, moreover, was satisfied by imports from more competitive producers at the expense of established suppliers. Finally, as I have already observed, the persistence of sluggish growth in the Maltese economy cannot be explained exclusively in terms of a cyclical downturn. Delays in implementing effective competitiveness-enhancing reforms were also a factor. As a result, the economy was not fully prepared to exploit the single market. 3. In these circumstances, isn’t this the worst time to be strait-jacketed by the conditions for euro adoption? Wouldn’t a fiscal boost speed up economic growth, now that your already limited monetary policy tools have been put in the shed? Allow me first to correct two misconceptions implicit in your second question. For a start, our monetary policy tools have not been put away but are available for use if needed, as was the case in April last year when the Bank’s central intervention rate was raised by 25 basis points.
And that kind of investment tends to go to countries with sound economic fundamentals, including a budget that is balanced over the course of the business cycle. More immediately, if we renege on the Convergence Programme targets, there would be a real risk of a drop in investor confidence. This is confirmed by recent developments in interest rates and in bond markets in central Europe, where markets have started to punish countries who risk delaying euro  2  BIS Review 16/2006  adoption. It is indeed relevant to point out that Malta’s current ‘A’ rating is predicated upon the continued pursuit of fiscal consolidation. There is an additional short-term gain from staying on course. As I have mentioned, fiscal restraint also helps to reduce the country’s external imbalance, and this, in turn, could allow a cut in the interest premium that investors require in order to hold Maltese lira assets. This would mean lower interest rates. On balance, therefore, the outcome of a u-turn on fiscal policy is unlikely to be positive. 4. Last year’s entry in ERM II has been described as hasty and premature. Why the rush to join the euro? Does it not rule out any possible adjustments to the value of the lira? One of the arguments made in support of this view is that our euro adoption calendar does not allow government to run a higher deficit and thus promote faster growth. I have just explained why I am not convinced by this argument.