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Malta: Excessive deficit procedure ended

 

According to the Commission, Malta has achieved a high degree of sustainable economic convergence and is ready to adopt the euro in January 2008. For Malta, main challenges were to control inflationary pressures and to bring its public deficit in a sustainable manner in line with the Maastricht criteria. Only a few months after Malta's accession to the EU in May 2004, the EU finance ministers opened the so called excessive deficit procedure, calling on Malta to reduce its public deficit to 3% of GDP, the limit set by the Maastricht Treaty.

The average inflation rate in Malta during the 12 months to March 2007 was 2.2%, below the reference value of 3.0%. It is likely to remain below the reference value in the coming months. Whilst the improvement in price stability is based on sound foundations, Malta needs to stay vigilant and stem inflationary risks as cyclical conditions improve.

The evolution of public finances shows a positive trend as a consequence of a fiscal consolidation programme. The Commission predicts a public deficit of 2.1% in 2007. and concluded that Malta corrected its excessive deficit. It therefore recommended EU finance ministers to end the excessive deficit procedure. Malta should nevertheless continue its efforts to improve the long-term sustainability of its public finances.

The other criteria were safely met. The long-term interest rates were well below the reference value over the period required. The exchange rate of the Maltese Lira has also remained stable vis-à-vis the central rate in the exchange rate mechanism (ERM II). Finally, with the Law amending the Central Bank of Malta Act also the legal requirements are met.

Who decides the conversion rate?

The Commission will propose a conversion rate for the Cypriot pounds and the Maltese Lira into euro in June. The formal decision is expected to be taken by EU finance ministers on 10 July.

Euro adoption: What are the benefits?

As Cyprus, Malta will benefit from macroeconomic stability, low inflation and low interest rates – both are a pre-condition for long-term economic prosperity, jobs and investment. With the disappearance of exchange rate costs, Maltese enterprises will save costs.

Does the Euro increase prices?

Before the euro, inflation had never been so low in so many countries and for such a long period of time. The changeover process in 2002 and more recently, this year, when Slovenia became member of the euro area is estimated to have increased prices by an additional 0.1 to 0.3 percentage points. So if the average price rise was € 2.30 for a € 100 basket of purchases, then no more than thirty euro cents of this increase was due to the euro.

When the Maastricht Treaty was politically approved by the Heads of State or Government at the European Council in Maastricht in 1991, the average inflation rate in the euro area was around 4%. Since the start of the third stage of EMU on 1 January 1999, annual inflation in the euro area – as measured by the harmonised index of consumer prices (HICP) – averaged 2.2%.

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