The reserves held by the Central Bank of Malta to back up the Lira will have to be transferred to the European Central Bank once the country joins the single currency and the Euro becomes legal tender.
According to veteran banker John Consiglio once Malta adopts the Euro the reason behind keeping foreign reserves to back the domestic currency will cease to exist.
“The Central Bank of Malta currently holds reserves because it needs to defend the Lira in foreign exchange markets. Similarly, it is the European Central Bank’s job to maintain adequate reserves to protect and sustain the Euro on the international market. Once Malta adopts the Euro, a large part of the reserves held by the Central Bank would have to be transferred to the European Central Bank,” Consiglio told The Malta Financial and Business Times.
Although the Central Bank might be required to keep some reserves, the statute of the ECB clearly states that the national central banks forming part of the European System of Central Banks would have to transfer their reserves according to a mathematical formula to the ECB.
In the past there have been lone voices suggesting that once Malta adopts the Euro the Central Bank’s reserves would fall into Government’s hands to be used as it deems fit. “That is absolutely rubbish,” Consiglio said when asked whether any of the CBM’s reserves will be liberated for use by Government.
Until now discussion on the Euro has been limited to whether Malta should join the single currency Exchange Rate Mechanism (ERM II) by year’s end to be able to adopt the Euro by 2008.
ERM II is a compulsory two year period preceding a country’s adoption of the Euro during which the member state’s currency will be totally pegged to the Euro. Determining the right exchange rate with which the Lira is locked to the Euro is a crucial factor since it can have serious consequences on Malta’s economy.
Even if joining ERM II by year’s end does not necessary mean Malta will be ready to adopt the Euro in 2008, experts warn that unnecessarily prolonging ERM II membership can send worrying signals to potential investors and credit rating agencies.
However, adopting the Euro at the earliest possible date means Government would have to reach the stringent Maastricht criteria for deficit, debt and inflation levels before 2008, which could require harsh belt-tightening measures to make it in time.