Malta’s economy on the path to the Euro

Abstract

With a GDP of around €5.1 billion and a population of 400,000 living in an area of 316 km2, Malta is the smallest and most densely populated EU Member State. In 2006 it had the fifth most open economy in the EU, and its average trade-to-GDP ratio hovered around 81% in recent years. These characteristics constitute a challenge for both policymakers and analysts in that key economic variables are prone to volatility, being highly sensitive to external events and to shocks in specific sectors or individual enterprises which, though small in absolute terms, can have a disproportionately large impact in a small country context. Such an economy clearly stands to benefit from closer economic and monetary integration with the euro area, particularly in terms of greater stability and policy credibility. The Maltese economy, moreover, is well suited to participate in the EU single currency area: it is already closely integrated with the EU through trade and finance; it has close similarities with the euro area in the sectoral composition of output and employment, as well as in terms of business cycle synchronisation; it enjoys a relatively high level of development (per capita GDP in PPS stands at around 74% and 70% of the EU25 and Euro area averages, respectively); and the currency has a long history of stability, with a strong peg to the euro in recent years.