11 May 2005

The Web

Free for all as retailers deviate from fixed Euro exchange rate

James Debono

The Central Bank may have set the Lira-Euro exchange rate at a fixed level upon entering ERMII but retail outlets are still not obliged to convert prices to Euro utilising the Bank’s rate, The Malta Financial and Business Times has learned.
A spokesperson for the Ministry of Finance confirmed that the exchange rate set by the Central Bank was just a middle rate.
On the other hand MLP Deputy Leader Charles Mangion called on government to launch a “name and shame” national information campaign to eliminate the abuse of those charging well beyond the fixed exchange rate.
On Sunday, sister newspaper MaltaToday revealed that the price of a cappuccino in at least one coffee shop in Valletta is 20 per cent higher in Euro than what it is supposed to be according to the fixed exchange rate established by the Central Bank.
A spokesperson for the Ministry of Finance told The Malta Financial and Business Times: “The rate issued by the Central Bank is a middle rate. This is not even imposed on the other banks. Banks are not obliged to sell according to this rate, nor are retailers.”
It seems that retail outlets are free to deviate from the central rate at will, thus overcharging those consumers, mostly tourists, paying in euros.
“Since Malta joined the European Union, all price controls have been removed. In a free market situation those who overcharge will end up losing customers,” added the Ministry’s spokesperson.

A Central Bank official confirmed that since the Maltese lira is still legal tender, the euro remains a foreign currency. “It is advisable for consumers, Maltese and foreigners alike to convert foreign currencies and use the Maltese currency.”
The official confirmed that as regards prices nothing has changed since Malta joined ERM II.
“In the past there were various outlets who used to convert their prices in sterling at rates not corresponding to the indicative rates issued by the Central Bank. There is nothing new in the new situation,” added the Central Bank official.
“Retailers will only be obliged to use the proper conversion rate when a system of double pricing is introduced.”
Asked when the announced system of double pricing will commence, the ministry’s spokesperson said that this will be decided by the Euro Strategy Working Group.
MLP Deputy Leader Charles Mangion called on the Department of Consumer Affairs to take action against those who are abusing by deviating substantially from the Central Bank rate.
“If we allow these abuses, the situation will get out of hand by the time we introduce the euro,” added Mangion.
Mangion called on the government to launch an intensive national campaign. He mentioned “name and shame” campaigns in other European countries as an example Malta should emulate.
Mangion also insisted that anyone adding commission to the Central Bank rate in establishing the retail price for his products or services in euro, should inform the consumer of these additional charges.


The Euro – advantages…

The main aspect of the Euro’s beneficial advantages for both political solidarity and economic viability is that a single currency across a wide geographical zone cuts transaction costs and increases competition.
By eliminating many of the added costs of national currencies and their exchange, the euro increases cross-border trade. It does so by eliminating the exchange-rate fluctuations which existed before, which changed the values of currencies across borders. It also encourages price equalisation and that means that businesses have to be more competitive since it is easier for consumers to spot good deals, and bad ones. And it removes the transaction costs of exchanging currencies within the eurozone.
These three factors ensure increased trade across the European Union, by removing those costs which hamper trade. Because of the decreased exchange-rate risk, the euro encourages lower interest rates. In the past, additional interest was charged to cover the risk of the exchange-rate fluctuation. This risk is gone with the introduction of the euro.
Of course, other spill-over effects ensue. Whilst businesses increase their trade across borders, people too find it easier to become employable across borders, since working with one currency makes it less harder for people to cross into another country to work: their salary is paid in the same currency they use in their own country.
Not only is labour mobility increased, but billing for services, products, or other types of payments are simplified with the euro.
This makes it easier for businesses to expand in neighbouring countries, without having to set up separate accounting systems for transactions in countries other than their native one. The euro makes it simple to operate from a single central accounting office and use a single bank.
This means that banks can offer financial products such as loans and investment portfolios, denominated in one single currency, across the entire eurozone. This has further ramifications in that it promotes trade with less restriction internationally, as well as strengthens the European financial markets.
On a macreconomic level, the criteria of the Stability and Growth Pact make sure that Member States control their inflation rates, deficit, and public debt.

… and disadvantages

However, the cost of transitioning 12 countries’ currencies over to a single currency has not been an easy task. Billions were spent not only producing the new currency, but in changing over accounting systems, software, printed materials, signs, vending machines, parking meters, phone booths, and every other type of machine that accepts currency.
In addition, there were hours of training necessary for employees, managers, and even consumers. Every government from national to local had impact costs of the transition. This enormous task required many hours of organisation, planning, and implementation, which fell on the shoulders of government agencies.
The chance of economic shock is another risk that comes along with the introduction of a single currency. On a macroeconomic level, fluctuations have in the past been controllable by each country.
With their own national currencies, countries could adjust interest rates to encourage investments and large consumer purchases.
But the euro makes interest-rate adjustments by individual countries impossible, so this form of recovery is lost. Interest rates for all of the eurozone are controlled by the European Central Bank.
They could also devalue their currency in an economic downturn by adjusting their exchange rate. This devaluation would encourage foreign purchases of their goods, which would then help bring the economy back to where it needed to be.
Since there is no longer an individual national currency, this method of economic recovery is also lost. There is no exchange-rate fluctuation for individual euro countries.
A third way they could adjust to economic shocks was through adjustments in government spending, such as unemployment and social welfare programs. In times of economic difficulty, when lay-offs increase and more citizens need unemployment benefits and other welfare funding, the government’s spending increases to make these payments. This puts money back into the economy and encourages spending, which helps bring the country out of its recession.
Because of the Stability and Growth Pact, governments are restricted to keeping their budget deficits within the requirements of the pact. This limits their freedom in spending during economically difficult times, and limits their effectiveness in pulling the country out of a recession.
In addition to the chance of economic shock within eurozone countries, there is also the chance of political shock. The lack of a single voice to speak for all euro countries could cause problems and tension among participants. There will always be the potential risk that a member country could collapse financially and adversely affect the entire system.

The European Exchange Rate Mechanism (ERM)

The ERM was introduced by the European Community in March 1979, as part of the European Monetary System (EMS), to reduce exchange-rate variability and achieve monetary stability in Europe, in preparation for the Economic and Monetary Union and the introduction of a single currency, the Euro, which took place in January 1999.

Economic requirements for participation
• Budget deficit not exceeding 3% of GDP
• Government debt not exceeding 60% of GDP
• Inflation within 1.5% of three best performing EU countries
• Interest rate within 2% of average rate of three countries with lowest inflation
• Exchange rate within fluctuation margins of ERM

The Stability and Growth Pact, drafted in 1996, states that fines will be charged to countries with excessive deficits greater than 3% of GDP. If they do, they will be charged 0.2% of GDP, plus 0.1% of GDP for every percentage point of deficit above 3%. However, countries in recession, defined as a fall by at least 2% for four fiscal quarters, may automatically be exempt. A fall by any amount from 0.75 to 2% requires a vote by the EU to impose the fine.


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