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Malta’s fiscal sustainability doubted
By MaltaMedia News
Jan 3, 2008 - 8:35:49 AM
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Malta and Cyprus who both adopted the euro just this week will almost certainly face further challenges adjusting their tiny economies to the euro-zone's one-size- fits-all monetary policy,
Dow Jones Newswires reported.
"Cyprus and Malta are incredibly small economies. And they will have issues specific to them on how they adjust to the euro," said Julian Callow, chief European economist at Barclays Capital. "We saw some similar issues in the case of Slovenia and Greece."
In Greece's case, the introduction of the euro brought about both a sharp, eight-percentage-point cut in interest rates in the year ahead of euro adoption but also a sharp increase in the country's current account deficit, now around 12% of gross domestic product.
In Slovenia, the adoption of the euro led to the largest percentage point jump in inflation of any euro member this year, with prices now rising at a 5.7% annual rate.
There is a question whether the European Central Bank's relatively low interest rates will have a big impact on Malta and Cyprus. Both islands’ economies are growing at more than 4 per cent - well above the euro-zone average; both face rising inflation and wage pressures; and both face elections early this year, prompting worries that several years of fiscal restraint in the run-up to euro entry may soon go out the window, the news agency stated.
Dow Jones reported that in Malta's case, there are also lingering concerns about fiscal policy ahead of spring 2008 elections. While Malta successfully brought its fiscal deficit down to around 1.6% of GDP this year, “at the same time, Prime Minister Lawrence Gonzi has already unveiled a generous 2008 budget while the opposition Labour Party is also hoping to curry favor with its economic program” which sees among others slashes in tax on overtime work and granting workers pay for public holidays that fall on weekends.
"Malta's fiscal sustainability is by no means assured," warns Willem Buiter, a professor at London School of Economics and a former member of the Bank of England's Monetary Policy Committee.
Central Bank of Malta Governor Michael Bonello, in an interview with Dow Jones Newswires, said he sees inflation running at around 3.2% next year before converging back to the euro-zone average in 2009.
Nonetheless there's little doubt that the euro will be an overall benefit to them both, Dow Jones stated as Malta and Cyprus are open economies that rely on, among other things, tourism and services, which they export to the rest of Europe.
“Adopting the euro will mean less currency risk for exporters, more competitive economies for consumers and, most importantly, a stable currency environment for much sought-after foreign investment.”
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Jan 3, 2008 - 9:03:36 PM CET
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