An Ode to the Lira

 4^th January 2008
The Malta Independent - Friday Wisdom

I mean to fill a great void. As we celebrated the switch of our currency to euro, while champagne corks popped, fireworks lit our skies in celebration and so many self-congratulatory speeches were made to mark our entry into the European Monetary Union, nobody seems to have found it proper to pay due respect to our own lira as it fades into history.

So, dear lira, I pay you my respects. Not because I have any regrets about your being replaced by the euro. On the contrary, I think this was an essential step to sustain our economic development. Some things have an air of inevitability and it was inevitable that in a globalised world a small country like ours could not afford to keep barriers which act as a drag on our participation in the global economy. So, sooner or later, you had to go like a valiant old warrior who can relate great history but can do little to overcome future challenges.

But you should be allowed to go with dignity. Your passing away should not be seen as a kick in the behind. As we celebrate our making the grade to participate in the much larger monetary union that is gaining market share in the international payments system and is shaping up as a formidable challenger to the dominance of the US dollar in the international foreign exchange reserves held by foreign central banks, we should also pay you due homage and express our heartfelt gratitude to the role you played in the long journey to make this possible.

I leave it to the historians to decide the date when you were actually borne. Although you officially existed in some form even before we gained independence, I think that officially you came into recognised existence when we became an independent state.

But as with so many other things this was a great change that left practically everything as it was. Dear lira, you continued to live in the shadow of the sterling pound, and when in November 1967 this was devalued (then it was said that Britannia that used to rule the waves was humbled and forced to waive the rules of the then existent Bretton Woods fixed exchange rate system) you swiftly followed to retain the long standing parity.

So I think that in practical terms your coming of age was in 1972 when the sterling area disintegrated. It was then that you started to part course from the British currency and follow your own destiny by establishing your own value rather than shadow sterling in strict parity. This was soon followed in 1973 by the dismantling of the Bretton Woods fixed exchange regime to be replaced by a floating one. I still remember President Nixon informing the world that America was “temporarily” suspending the conversion of the US dollar into gold at $35 an ounce (currently it is worth some $850) which was the anchor of the fixed exchange rate system in force for 25 years after the second world war.

The temporary suspension proved permanent in what is, in substance, the biggest daylight robbery and transfer of wealth from the poor to the rich in the history of humanity.

Our political leaders and monetary authorities showed great foresight at that time in linking your external value to a basket of currencies that broadly reflected our international trade patterns. This was a novelty at the time, but it was soon imitated by many other countries who were no longer a satellite of a single bigger country but were converting their newly found political independence into economic prowess by extending their trading networks.

You suffered a setback in 1992 when our two main trading partners, the UK and Italy, saw their own currencies come under international pressure as the then existing European Monetary System permitting exchange rate fluctuations within a very narrow band disintegrated as inflation differential between various EU countries grew too great to bear.

We decided to devalue you by 10 per cent to avoid a shock misalignment with the currency of two of our main trading partners. However as this step was not accompanied by other necessary measures to ensure that inflation did not spiral up to dilute the temporary competitive fillip, regret at such a measure was not long in coming.

So much so that even in the run up to the entry into the first stage of the European Monetary Union in May 2005 we avoided making a necessary one time downward adjustment to ensure that we join the euro at a competitive rate which helps, rather than hinders, economic growth.

The experience of 1992 and our inability to marshal consensus on a set of complementary measures to avoid igniting an inflationary spiral forced us to keep you stable and switch adjustment to the real economy. I was very sceptical that this would work out, but luck was on our side. The EU economy went into an unexpected growth path, which made adjustment less painful than expected.

So as we all rush to change you into euros we salute you for serving us well. Some say this could be an “au revoir” rather than “adieu” as the history of monetary unions without a political union does not augur well for longevity. But I don’t want to raise your hopes too high, as things in this globalised world are not what they used to be and we have to have faith that this is an irreversible step.

Wish us well in putting away political short term manoeuvering and finding the courage to take the necessary steps to render our economy more flexible in order to survive and prosper under your Euro successor. Starting of course with all measures which institutionalise legislative pay increases linked to cost of living rather than productivity. But these are arguments for after the election.

Thanks, lira.