Malta keeps a keen eye on euro prices

Memories of price-hikes in Italy haunt Malta as the island switches to the single currency, writes Tim King.

The spectre that hangs over Malta’s changeover to the euro is the memory of Italy’s transition from the lira to the European single currency. When euro notes and coins were introduced in 2002 in the then 12 countries of the eurozone, it was in Italy that the worst problems arose, with complaints about price increases for foodstuffs and other common purchases. This euro-induced inflation is part of the reason why even today many Italians call for a return to the lira and there is a residual disaffection with the euro.

Back in 2002, the Maltese people were spectators on the sidelines, not even members of the European Union, let alone of the eurozone. But they saw and they remember the discomfort of their neighbours, which had to be taken into account in preparations for Malta’s admission to the eurozone on 1 January 2008.

Tonio Fenech, parliamentary secretary for finance in the Maltese government, who has been overseeing Malta’s changeover to the euro, said: "There was always this concern that when the changeover took place there might be people putting up prices. We have been very much influenced by what happened in Italy. A lot of Maltese see Italian TV, so many have still fresh in their minds what happened in Italy, which became a huge political issue. Being so close, people thought it would be the same in Malta."

But last Friday (12 January), as EU leaders celebrated Malta’s eurozone membership with a concert and a round of speeches in the capital, Valletta, the prevailing opinion was that Malta had avoided a repetition of the Italian experience.

Jean-Claude Trichet, the president of the European Central Bank, said: "The cash changeover was exemplary so far."

José Manuel Barroso, the president of the European Commission, proclaimed the changeover "an incredible success".

Fenech said that the government had set up a team of officials to check on reported cases of price increases within two hours of anyone calling in to complain. He knew of 36 cases where his staff had issued warnings to retailers. Of those 36, 30 had already reverted back to earlier prices.

Almost all retailers have signed up to a code of conduct on pricing, promising not to use the changeover to increase prices.

A study by the Union Haddiema Maghqudin reported on Friday that of a sample of 200 products, 162 remained unchanged with the introduction of the euro, 12 saw price falls and 26 saw price increases, of which 24 were for food products.

Not everything has gone smoothly. Bus-drivers, for instance, were struggling to give change as the rigorous conversion formula meant that they demanded a fare of €1.16 for what had previously been a fare of ML0.50. In the early days of January, there were lengthy queues at banks as Maltese residents sought to convert their cash stocks of Maltese lira into euros. Fenech blamed the queues on a Maltese reliance on cash.

It is still possible that the euro changeover may be perceived as having an inflationary effect, depending on what happens to prices. Fenech regretted the increases in prices for oil and food that have happened since the summer, but was grateful that at least those price rises had begun before 1 January. "There is a campaign by the opposition trying to blame it on the euro," Fenech says.

The 12-month average monthly rate of inflation is 0.7%, the lowest in the EU. The year-on-year rate, comparing December 2007 with December 2006, is 3.1%, which matches the eurozone average. But prices, Fenech says, will continue to rise. Malta is preparing for a general election, which could come as early as March. Announcement of the exact date, which was being held back in part by a desire to get the euro changeover out of the way first, could come as early as this week.

Opinion polls suggest that the centre-right government of Lawrence Gonzi, who is both prime minister and finance minister, will not necessarily reap electoral rewards from the conversion to the euro, or from the economic discipline that had to be applied to meet the conditions for eurozone membership. The government’s stability programme, published last month, projects that a balanced budget will be reached in 2010. The budget deficit has been reduced to less than 2% of gross domestic product (GDP). Government debt is projected to fall below 60% of GDP in 2008. Privatisations have helped improve the figures and the government is in the midst of selling a 40% stake in the post office.

But the Maltese economy is dependent on exporting goods and services and on tourism. What is uncertain is how vulnerable it might prove to any downturn in the global and European economies. It could yet prove more resilient than Italy, but once again Italy is not a model to be followed.

Memories of price-hikes in Italy haunt Malta as the island switches to the single currency, writes Tim King.