Clearing hurdles

The news of the European Commission's endorsement of Malta's entry into the Euro zone in January has been reported widely in the European media. However, in a seperate assessment, also published today, the European Central bank stated that Malta has failed to meet the EU convergence criteria on keeping low government debt required to join the Euro. Marilyn Gerlach writes for Thomson Financial and Forbes:

The European Central Bank said Cyprus and Malta have failed to meet the EU convergence criteria on keeping their government debts at low levels in order to join the euro. It said for the year to March, the government debts of both countries breached the 60 pct of GDP criteria for euro entrants but passed the criteria on inflation, long-term interest rates and budget deficits...But the ECB made no recommendations on the timing of the two countries' entry into the euro. The EU Commission today said both could join the euro on Jan 1, 2008, as scheduled..

It said both countries need to continue on a sustainable and credible path of fiscal consolidation based on structural measures to improve its fiscal performance by tangibly reducing its high debt ratio. Malta's government debt-to-GDP ratio dropped to 66.5 pct in 2006 and is forecast to be 65.9 pct in 2007. The ECB said Malta needs to maintain moderate wage developments both in the public and private sector. Commenting on both countries' 12-month average inflation, the ECB said it was at 2.0 pct for Cyprus and 2.2 pct for Malta -- both well below the limit for euro entry of 3.0 pct resulting from the convergence criteria.

For Malta, the ECB said latest inflation forecasts indicate a range from 1.4 pct to 2.4 pct for 2007 and from 2.1 pct to 2.4 pct for 2008, with upside risks to inflation linked with a potential renewed increase in oil prices. Cyprus recorded a fiscal deficit of 1.5 pct of GDP and for Malta, it was 2.6 pct -- both below the 3 pct euro entry criterion...In terms of long-term interest rates, Cyprus had 4.2 pct during the reference period and 4.3 pct for Malta. The limit was 6.4 pct. The ECB said in recent years, Maltese long-term interest rates and their differential with government bond yields in the euro area have generally declined...

From IHT: Malta clears hurdles to Euro zone; Report by the European Commission; Report by the European Central Bank