 The
new year gave birth to a new form of cynicism precisely that of
combating the euro hype.
NECC reminds us that euro is extremely important to us.Its leaflets
assure us of the net benefits that we are going to reap which in the
long term are positive and substantial. Typically we are going to
increase our exports and, that business will move faster and better
than under the lira regime.
They remind us how the economy has progressed to achieve euro
convergence. Others such as Slovakia still hope to fulfil the
three-per-cent budget deficit requirement, at 40 per cent, the
nation’s debt is already well within the 60 per cent target.By
comparison it is unlikely that Poland and the Czech Republic will
adopt the common currency before 2012 with Hungary possibly two
years later.
Back to Malta, realists who remember the conversion to decimal
currency warn us that there will be problems during a transitional
period but pointed out that progress comes with reform.
During a short period, lira notes and Maltese coins will circulate
alongside euro notes and coins. This transition is necessary since
sufficient time is needed to withdraw lira notes and coins from
circulation.
But cynics like me tend to stand back and reflect on the finer
elements of life like the endless “Victory kitchen” queues at banks
by common folk and retailers waiting their turn in the cold weather.
Last week hundreds scrambled to obtain euro from commercial banks,
with long queues of people wanting to secure coins and banknotes
before they start using them. Shops, businesses and banks have been
displaying their prices in lira and euro for the past six months to
help consumers get used to the new scale of values while the
Ministry of Finance have secured agreement with suppliers to freeze
prices for three months.
 Retailers,
shop owners and “Monti” hawkers had mixed comments on the first
days. Most argued that business was slower since hawkers did not
have much change and the queues at the bank to exchange liri are too
long. Disappointment at the long queues forced some retailers to
suggest that NECC should have let shoppers change their money a
month ago to be well stocked. This is apart from the fact that
hoards of Lm20 notes have not been deposited in banks prior to e-day
and are surfacing now. Bank of Valletta rebuts the argument by
stating that its branch network, distributed over 15,000 retail
starter kits and about 100,000 personal mini-kits prior to E-day.
This bank estimates that in all when all cash in circulation is
collected there will be over 450 tons of coins and over 35 million
bank notes .
It goes without saying that the gamble of the euro conversion
executed under the shadow of a general election compounds the stress
factor.It may be one of the reasons why money in circulation has
shied away from seeking shelter in banks.Central Bank announced that
over Lm200 million is still in circulation partly concealed in Lm20
notes under mattresses or in safes.This was after the second
extension of a generous tax amnesty for hoarders of cash undeclared
for tax purposes. But life goes on and voters are conscious that in
view of the Spring election both major political parties are
pledging generous initiatives and may close one eye on undeclared
hoards. Santa in its Budget for 2008 announced generous tax cuts and
other benefits, while the opposition party is promising “to slash
tax on overtime work, grant workers pay for public holidays that
fall on weekends, and boost heavy industry, especially at Malta’s
ports, while pushing the growth rate up to as much as 6%.
So far our best estimate for 2007 will not exceed 4% GDP growth and
is expected to slow down this year due to higher oil and cereal
prices.
 This
will further strain our competitiveness even though there will be
positive purchasing power gains from using a strong euro currency
vis-a-vis the dollar. Exporters may well heed John Dalli’s warning
about the alleged high parity rate of the lira. Then, as finance
minister, now personal advisor to PM; Dalli had in 1994 been the
architect of the assertive 10% devaluation which removed any
skewness within the sterling content.
Fact is that we made it and together with Cyprus we have adopted the
euro in January.
The Cyprus pound currently trades at around 1.73 euros which
compares with 2.32 euros of the stronger lira. The exchange rate of
the Cyprus pound to the euro has been set at 0.585274 as compared
with the stronger lira set at 0.429300.
Cyprus reduced its deficit to a manageable 1.5 percent of GDP by the
end of 2007, whereas unemployment remains at around 5.5 percent,
much lower than the EU 27 average of 8.2 percent. Problems such as
shortage of free euro converters and ill-prepared shops were
reported in Cypriot media. Long queues at banks were also witnessed
in the capital city Nicosia. Some 430 parking meters in Nicosia also
encountered problems and had to be covered up. Luckily for us we
witnessed less problems with converters although some vending
machines in schools were not working. Yet, the lingering doubt still
persists on the correctness of our exchange rate.
Now an unpublished IMF report (July 2006 ) was quoted on MaltaStar
as saying the Commission wrote: “The IMF report… repeatedly suggests
that the current exchange rate of the Maltese lira is significantly
overvalued and is the source of Malta’s competitiveness problems.
The IMF staff evaluation of July last year was rather less than
complimentary regarding Maltese economic performance.
It appears that we are have not always acted smart with hindsight.
According to the Central Bank of Malta, between 2002 and 2006,
overvaluation of the lira grew overall from zero in 2002 to some 9
percent in 2006. Yet notwithstanding this alleged over-valuation
inflation for imported items have been higher than in the rest of
the eurozone. You would have expected a lowering in the cost of
living index. Paradoxically, on its merits this seems to contradict
the claim that the lira has been set at an overvalued rate.
 So
let us see how others have fared so far since joining the eurozone .
Typically one compares the experiences of Euro adoption in Greece,
2001, and Slovenia, a year ago. Both registered economic progress,
but not without “harmful side-effects”. On a positive note their
experiences show that a monetary policy set by the European Central
Bank can be a mixed blessing for small, fast-growing economy such as
Slovenia .
Slovenia is a country of 2 million which enjoys a clean and
prosperous tourism and looks more like Switzerland than communist
ex-Yugoslavia, which it quit in 1991 after a brief war with the
Serb-dominated federal army.
Nevertheless, its government admits that prices could rise as a
result of the euro’s introduction - a recent survey highlighted that
around 40% of Slovenians are concerned about inflation. Shoppers
find prices are going up every day. Housewives retort that it’s the
worst with small items. Cost of living hiked as inflation jumped to
5.7 percent. Quoting political analyst Meta Roglic at Dnevnik, one
notices the latest figures, particularly inflation, show that
Slovenia is losing some of the competitive advantage it had over
other EU newcomers.
Slovenian Consumers’ Association has found that the services sector
heads the list of euro-related price hikes. According to its
statistics, services were far more frequently to blame for
euro-related price hikes than products. Findings of its Pricewatch
project of price monitoring suggest what official consumer price
index statistics have also shown that there was more price increases
following the adoption of the euro among providers of services than
among retailers. To conclude, most journalists in Malta laud the
smooth cross-over from the lira to euro. Even Edward Mercieca’s
Christmas panto harks us to drop the lira and embrace the eight
pointed cross of our euro currency.
George M.Mangion
The writer is a partner in PKFMALTA an audit and business advisory
firm
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