In these circumstances, had we allowed the exchange rate to adjust to market pressures within the 15 per cent band, the currency would have appreciated. 5. You seem to be playing down the efficacy of the fiscal deficit and of exchange rate adjustment as a means of jump starting the economy. What would you suggest instead? As I have already pointed out, the domestic factors which are contributing to the economy’s anaemic growth record are largely microeconomic in nature. I have also explained why deficit financing and changes in the nominal exchange rate cannot correct these weaknesses, still less produce sustainable growth. Policy orientation must eschew short-term palliatives. Like our competitors we must learn to come to terms with globalization. Reflecting on one simple fact should help in understanding what this means: the hourly cost of labour of an electronics operative in Malta is around $ compared with $ in Singapore and $ in China. Neither more government spending nor a devaluation can narrow that gap. Against this background, maintaining external competitiveness in the long run depends on continued moderation in wage growth, faster increases in labour productivity and sustainable budget positions. I make no claim to originality in proposing this prescription; it is shared by the EU Commission, the ECB and the IMF. I shall first address the last objective. Given that taxation levels are already high, fiscal consolidation should be achieved by cutting recurrent spending.
In the area of foreign exchange, there would no longer be a need to provide marketmaking facilities once the euro becomes our domestic currency, or to retain the current foreign exchange facilities offered to government at their existing level. Our reserve management role, however, would remain; not only to manage our own reserves, but also to manage part of the ECB’s portfolio. Likewise, the Bank would retain its function as issuer of notes and coins and would thus have to meet the local demand for euro. It would also need to analyse suspected counterfeit euro notes and coins. Particularly important will be the Bank’s role in providing a channel for both domestic and cross border, high value payments by linking our payment system with the Eurosystem’s TARGET, as well as in operating a mechanism for the cross border delivery of assets for collateralisation purposes. The adoption of the euro will also integrate further Malta’s financial system with that of the euro area, so that the Bank’s financial stability and internal audit responsibilities will assume a cross border dimension because weaknesses in any one Member State could impact directly on the stability of the entire system. For example, we will have to cooperate closely with other central banks and the ECB to prevent the emergence of systemic crises. This will involve strengthening our institutional and analytical capacities to detect potential vulnerabilities in our own financial system.