23 May 2007

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The euro adoption - Q & A

Interview with C.J. Farrugia, Executive Director and Head of Corporate Investment and Markets, HSBC Bank Malta p.l.c.

Which countries joined the European Union (EU) at the enlargement with Malta?
At the enlargement of the EU on 1 May 2004, 10 countries joined the EU. Together with Malta, the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Poland, Slovakia and Slovenia also joined the EU bringing the number to 25 countries. On 13 January 2007 Bulgaria and Rumania also joined and now there are 27 countries.
The HSBC Group has an office in 5 of these new accession countries - Czech Republic, Cyprus, Hungary, Poland and Slovakia. In addition HSBC Group has offices in 9 of the other 12 countries HSBC Malta is therefore in a strong position to support and assist local businesses which have an interest to trade with the new European Union countries.
The countries of Bulgaria and Romania joined the EU on 1st January 2007. Accession negotiations with Turkey and Croatia started on 3 October 2005.

Is Malta obliged to adopt the euro?
When Malta became a member of the European Union (EU) on May 1, 2004, it immediately became a member of the Economic and Monetary Union (EMU) and was obliged to adopt the euro as its national currency at a later stage. Unlike Denmark, Sweden and the United Kingdom, which are not obliged to adopt the euro even if they fulfil the Maastricht criteria, all new EU Member States do not have a right to opt out of the single currency.
With the entry of the Maltese lira in the European Exchange Rate Mechanism (better known as ERM II) on the 2nd May 2005, the first step towards the adoption of the euro in Malta was taken. Following a minimum mandatory period of two years participation in ERM II, whilst our economy converges to meet the real and nominal Maastricht criteria, it is anticipated that the euro will become Malta’s legal tender on the 1st January 2008. Malta is expected to be given the final green light around the middle of this year, when the final irrevocable exchange rate (fixed conversion rate) between the euro and the Maltese lira would be set. Presently, Malta has a Central Parity Rate where one euro is equivalent to Lm 0.429300.
This is not the first experience for HSBC in the case of euro adoption. HSBC was already present in 9 of EU countries when the euro was first introduced as a physical currency in January 2002 including Germany, France, Italy and Spain.

How was the central parity rate of the Maltese lira against the euro determined?
The process of joining ERM II and the establishment of the central parity rate was initiated by a joint request from the Finance Minister and Central Bank Governor. The decision was taken by mutual agreement of the Finance Ministers and the Central Bank Governors of the non-euro area member states together with the President of the European Central Bank (ECB). The European Commission and the Economic and Financial Committee (the advisory arm of the EU Council of Economic and Finance Ministers) were also involved, as were central banks and ministers of Member States outside the euro area.
Realignments of the central parity rate are made by common procedure, which both the ECB and the member states have the right to initiate. At no point in the process can the Central Bank of Malta or the Government of Malta modify the central parity rate on their own.

What are the Maastricht criteria?
In order to adopt the euro, new member states have to achieve a high degree of economic convergence (i.e. bridging the gap in economic differences between old and new EU member states), which is assessed on the basis of the fulfilment of the convergence (or Maastricht) criteria. The key characteristic of these conditions is stability.
The degree of convergence is assessed by the EU Council on the basis of reports submitted by the European Commission and the European Central Bank (ECB). These reports are prepared at least once every two years, or upon the request of any EU member state wishing to adopt the euro.
The convergence criteria are related to achieving a low level of inflation and long-term interest rates, sound public finances, stability of the exchange rate and legal convergence, viz.
Inflation rate not exceeding more than 1.5% of best three countries
Government deficit to GDP should not exceed 3%
Government debt to GDP should not exceed 60%
Convergence of long-term interest rates
Exchange rate stability and participation in ERM II for two years.
Slovenia was the first country from the new EU member states that adopted the euro on 1st January 2007. Malta and Cyprus are expected to adopt the euro as their national currency on 1stJanuary, 2008.

(To be continued next week)

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