“Malta has achieved a high degree of economic convergence with the euro area and is ready to adopt the euro in January 2008. However, to ensure that euro adoption will be a truly successful story, Malta should pursue its efforts towards fiscal consolidation and towards preserving external competitiveness, including through policies fostering productivity growth. Malta must also speed up and finalise the crucial practical preparations to ensure that the changeover takes place smoothly, as was the case in Slovenia at the beginning of this year” said Joaquin Almunia, European Commissioner for Economic and Monetary Affairs.
On 27 February, the Maltese government asked the Commission to assess that the country met the conditions necessary to adopt the euro. To become part of the euro area, a European Union country must have achieved a high degree of sustainable economic convergence, measured against the criteria set out in Article 121(1) of the EU Treaty regarding the government budgetary position, price stability, exchange rate stability and convergence of long-term interest rates. Compatibility of the legal framework with the Treaty must also be examined.
Having carefully assessed the request, the Commission today adopted a Convergence Report concluding that Malta meets the necessary conditions and proposes to the Council that it adopts the euro next January. The European Central Bank also adopted a Convergence Report reaching the same conclusion.
Inflation
The average inflation rate in Malta during the 12 months to March 2007 was 2.2 percent, below the reference value of 3.0 percent, It is likely to continue below the reference value in the coming months. Moderate core inflation indicates that underlying inflationary pressures have remained limited. Progress towards price stability has been supported by wage discipline and increasing competition in some product markets, also related to integration in the EU single market and effects of globalisation. The improvement in price stability is based on sound foundations, suggesting that the moderate levels of inflation will be maintained after euro adoption.
Nevertheless, Malta will need to stay vigilant and stem inflationary risks as cyclical conditions improve. A prudent fiscal stance aimed at avoiding the build-up of excessive demand pressures and wage developments in line with productivity gains would be well advised. Continued structural reforms to improve the functioning of product markets, in particular utilities), are also warranted.
Budgetary situation
Separately, today the Commission also concluded that Malta had corrected its budget deficit and recommended that the ECOFIN Council abrogates the excessive deficit procedure started upon accession to the EU, in 2004 (see IP/07/672).The deficit-to-GDP ratio decreased from 10% in 2003 to 2.6% in 2006 and, according to the Commission's spring forecast, would amount to 2.1% in 2007. The government debt increased significantly in the first half of the decade, but has followed a downward path since 2004 to reach 66.5% of GDP in 2006. In view of this, the Commission considers that Malta has corrected its deficit in a credible and sustainable way and its debt is diminishing at a satisfactory pace towards the Treaty reference value of 60% of GDP. Malta, therefore, meets the budgetary criterion. It should, nevertheless, continue efforts to reduce the debt-to-GDP ratio and to make further progress in the design and implementation of the healthcare reform in order to improve the long-term sustainability of its public finances.
Exchange rate
The Maltese lira has participated in the Exchange Rate Mechanism ERM II since 2 May 2005, i.e. for 24 months at the time of the adoption of this report. During these two years, the lira has remained stable vis-à-vis the central rate and has not experienced severe tensions.
Long-term interest rates
The average long-term interest rate in Malta in the year to March 2007 was 4.3%, below the reference value of 6.4%. Average long-term interest rates in Malta have been below the reference value since EU accession. Long-term yield spreads vis-à-vis the euro area have also fluctuated at relatively moderate levels and decreased further since 2005, which testifies to the low residual country risk priced in by markets
Legal convergence
All outstanding incompatibilities have been addressed in a Law amending the Central Bank of Malta Act adopted by Parliament on 28 February 2007. Legislation in Malta, in particular the Central Bank of Malta Act, is now compatible with the requirements of the EC Treaty and the ESCB Statute.
