24 August 2005

The Web

Euro perceptions

The former Bank of Valletta chairman, Joseph FX Zahra has returned to the limelight with the brief of facilitating the changeover to the Euro expected to take place in two years’ time.
Zahra heads the National Euro Changeover Committee (NECC) set up recently by government to draw up a strategic plan that will not only facilitate the technical transition from the Maltese Lira to the Euro but also communicate with and inform the general public of the various stages involved.
Zahra concedes, changing perceptions that the Euro will raise inflation is not going to be an easy task. He says that despite the constant bombardment on Italian television that the Euro had raised inflation there, statistics show that the Euro only contributed to an increase of less than 0.5 per cent.
Zahra says that rounding up in Italy occurred on mundane objects such as a cappuccino and this contributed to the general perception that prices were rounded up across the board. Given Malta’s proximity to Italy, that perception has also permeated to the Maltese psyche.
But changing over to the Euro should be less problematic for a country that already operates a decimal currency. Zahra says that the biggest difficulty for business operators abroad was the training of the staff behind the tills. “In countries where people were used to currencies with numerous zeros, the training had to be much more rigorous. In our case, converting from one decimal currency to another decimal currency would be much easier,” Zahra says.

From an economic point of view what advantages can the country expect from adopting the single currency?
This is a natural economic process that will lead to Malta’s full economic integration into the European Union. The dependence on the European community has always been strong. If we had to look at our imports and exports, tourism and the sources of various services that we provide, most of them are linked to the European market.
The major benefits for the economy from EU membership can be derived once full integration is achieved and a major factor for integration is the currency in which you trade and transact. For one to have a seamless transaction within the market we operate in, it would be ideal to have the same currency. The implications are various. A single currency enables transparency in cost structures and pricing and it also means that we can compare prices for particular objects in Malta with prices abroad.

Theoretically speaking the country can continue in ERM II mode beyond the mandatory two year period which ends in 2008 before adopting the single currency. Can the country afford to miss the 1 January 2008 deadline?
A number of factors have to be considered. The sooner Malta enters the Euro zone, undoubtedly the better it will be. All indications so far point towards an economy, particularly public finances, moving in the correct direction to meet the convergence criteria.
I must however say that these issues do not fall under the remit of the National Euro Changeover Committee (NECC). The NECC is there to ensure an efficient seamless transition between one currency and another. In certain respects ours is a technical role. We have to ensure that the country is technically and psychologically prepared for the changeover.

How is the NECC structured and what functions will it perform?
We have started a lot of preparation work. Besides the steering committee headed by the parliamentary secretary for finance and which also includes as members, myself as chairman of NECC, the most senior government official Dr Godwin Grima and the governor of the Central Bank, the more intricate work is conducted by the NECC which reports to the steering committee.
In the NECC there are representatives of all the stakeholders; there are representatives of the financial sector, of the private sector, consumer representatives, the government financial sector, representatives of the public sector, the education sector and the legal sector.
It is important to have the education sector represented particularly because it concerns among other issues, examinations and the publishing of books for schools where reference to the Maltese Lira will have to be changed.
The legal sector has to be there because a number of laws making reference to the Maltese Lira will have to be amended accordingly.
But it is not just a question of bringing stakeholders together. Our role is twofold; we have to establish a strategic plan on the conversion that needs to be done on a national level and monitor it from a logistic point of view to ascertain it is being implemented within the right timeframes and on a second level, we have a communications role to ensure the change is understood by all sectors of the community.
The representatives on NECC are chairpersons of sub-committees where various constituted bodies are represented. These are establishing the concerns of the various interest groups.

Between the technical aspect and the communications role entrusted to NECC, what would you say is the more difficult to implement?
Both are hard nuts to crack. You could have an extremely well planned strategy on conversion in terms of logistics and technicality but unless on a communications level you listen to the concerns and address them effectively, the technical side will not happen.
There are the hard and soft aspects of conversion. The hard core are undoubtedly the technical capabilities but on their own they won’t work unless the soft skills are in place. And this is not easy.

Having witnessed the changeover in other countries, people are undoubtedly scared of an increase in inflation because of abusive rounding up. How difficult is it to counter that perception and is it just a perception?
It is primarily a perception. There is what we term perceptive pricing. It is a question of trust. People don’t believe easily that if business has the opportunity to change prices it will be to their advantage as consumers. In actual fact, most of it is done in a fair and transparent way.
Watching Italian TV and listening to Italian politicians we have come to believe that Euro conversion has had an inflationary impact. In actual fact statistics have shown that the effect of the Euro conversion on inflation in Italy has been minimal; less than 0.5 per cent impact on the total inflation rate.
However, ordinary Italians think the Euro had an inflationary impact because those consumer products which are closest to home such as the price of a cappuccino or an espresso and the price of a pizza were the ones where inflation was felt most. When people bought their refrigerator or clothing, prices not only remained the same but in some instances actually fell. But when it came to those items which are more visible there was rounding up giving the impression that inflation shot up.
In our case we have to learn from this experience. Looking at this two year time span that we have in front of us, I think we have to be absolutely sure that any abuse or misuse of this process is tackled seriously.

Some bars and restaurants are already printing on their receipts the cost in both Maltese Lira and Euro. In some cases the price in Euro is more than 20 per cent higher than it should be if the Central Bank’s fixed exchange rate is used as a benchmark. Could this practice fuel the perception that the Euro will mean higher prices?
Although these situations are not rampant, most of them are localised in tourist areas, it does worry me. I must stress that there is only one currency in Malta at the moment and it is the Maltese Lira. There is also an official rate as determined by the Central Bank and all conversions have to be done at that rate.
Those businesses who are taking advantage of this situation are doing it at their own risk. It is true that banks are allowed a profit margin on the exchange rate but it still hovers around the middle exchange rate. But these outlets are in the business of selling cappuccinos and not in the business of selling currency. They are not licensed to do business in other currencies.
They may be making life easier for the tourist and this is a positive factor but one has to keep in mind there is an official exchange rate.
When bills are issued in two currencies not utilising the rate determined by the Central Bank this could instigate negative perceptions. These type of situations need to be looked at. There is legislation in place and the Central Bank has already clarified its position on the issue. We need to work on moral suasion to convince retailers to act in a correct way to avoid taking drastic action.

Would you advocate drastic action?
I am a great believer in market forces because they give you the opportunity to iron out such situations. Tourists are no fools. They can immediately compare what they are paying for a cappuccino here as to what they are paying in Rome. The market will have a say in weeding out abuse. However, legislation already exists that controls such situations and retailers have to know that there is only one currency in Malta and so even when issuing receipts, the price in Euro has to be in a smaller print than the equivalent price in Maltese Lira.

When would you expect dual pricing to come into force?
Dual pricing has to be divided into two aspects; post changeover and in the run-up to E-day.
It is crucial after Euro adoption to have a period of time when both prices are still visible at retailers. But it will also be in our interest to have official dual pricing start before E-day as soon as the change-over exchange rate is determined and Malta is given the official go-ahead for Euro adoption by the European Central Bank and the Commission.
By starting dual pricing before adoption we could better guard against rounding up.

Some have suggested starting dual pricing much earlier than the couple of months before E-day as you seem to suggest. What is your opinion?
It is very early to start dual pricing now. We have to have the assurance that Malta will eventually adopt the Euro. There is an official process which needs to be respected. The confirmation as to when Malta can join the Euro-zone will only take place after the yearly European commission meeting in mid 2007. Of course preparations would have started well before that date to ensure that we will be completely ready for adoption by 1 January 2008.

Businesses have to undertake expensive changeover measures. How will the NECC liaise with the business community, particularly the smaller family-run units to ensure a smooth changeover?
All change will incur an element of expenses. But they are very much of a manageable level particularly if one starts planning ahead. If a business is currently printing its invoices with the Maltese Lira and normally it prints enough to cover a two year period, knowing that on any day after 1 January 2008 Malta may adopt the Euro, it would make sense for that business to print invoices covering a year and a half’s supply.
It is all about preparation. The same holds for IT systems where preparations have to be made in advance.
One of our task forces is going to be an IT task force because we have to make sure that all suppliers of software are passing on this message to their prospective and current customers.
The major difficulties small operators had in other countries were not those of having to change the price on products or cash registers but actually of training the person behind the till in handling a currency calculated in decimals.
In countries where people were used to currencies with numerous zeros, the training had to be much more rigorous. In our case, converting from one decimal currency to another decimal currency would be much easier.
I don’t want to sound as if this was a very easy task to achieve but with a sound communications strategy which puts emphasis on educational issues that target various groups in society the changeover can be handled in an easier way.

Government and the Central Bank opted for a fixed peg upon joining ERM II. As an economist what is your view on the issue?
This is my personal opinion because as chairman of NECC it is not in my remit to discuss these issues. An exchange rate is a price signal. We can always say that it is desirable to have a price that can help us export more but we also know that if we do so our import bill will be higher which would also have an inflationary effect consequently raising our production cost. It is a vicious circle, not a virtuous one.
It was a very wise decision on behalf of the Central Bank to establish an exchange rate with enough space for movement but which gives a very clear signal to the market as to what the final exchange rate will be between the Maltese Lira and the Euro.
My answer to those who have criticised the fixed peg on the basis of competitiveness is simple; let us not, for God’s sake only look at this price signal to achieve competitiveness. We have to look at our industrial structures, our retail structures, infrastructural support given to enterprise and do away with the practices that are pushing our costs up. We have to rationalise in a number of utilities and businesses so that we would be more cost-efficient. We also have to make sure that our family businesses strive towards being more professional.
The Central Bank’s decision has given us an opportunity to have a hard look at work practices in our business and industrial structures to strive for more efficiency and modernisation.
Within this context the fixed exchange rate with the margin that it has been given by the ECB has ensured there won’t be any space for currency speculation.

However, the Central Bank has said that it won’t be utilising the 15 per cent fluctuation margin afforded to it by the European Central Bank. Was this a wise statement to make?
Absolute rigidity is not allowed, particularly in an open economy which is affected by what takes place around us. You always have to have a margin of space in which to manoeuvre. As to whether the Central Bank will use that margin or not that is a decision they will have to take. But the fact that the Central Bank has publicly declared its intention on the fixed rate shows clearly that the bank is interested in monetary stability and any type of stability, particularly when dealing with foreign exchange, is not only to the advantage of business that is transacting on an international level but also for the consumer who is gaining from more stable prices.
Joseph FX Zahra was interviewed by Kurt Sansone

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