‘Club Med’ is in vogue as Cyprus, Malta join euro

PARIS – Europe’s common currency extends its Mediterranean reach when Cyprus and Malta surrender their currencies and adopt the euro in January, but the increase in membership is making ripples rather than waves. What Germany’s once mighty central bank feared 10 years ago – that the euro would become a «Club Med» currency – will be closer to the truth with their arrival in the group, but not in the ill-disciplined sense the Bundesbank so disdained. While the change will surely be significant for the peoples of two island economies that will switch overnight to euros from Cypriot pounds and Maltese lira, it makes little difference to the eurozone’s weight in the world. Malta’s economic output is less than 0.1 percent of the eurozone overall and Cyprus’s gross domestic product is less than 0.2 percent of the bloc’s total GDP, according to GDP data published by Eurostat, the EU statistics office. «The increase from 13 to 15 will not make a big difference, especially given the nature of the newcomers,» says Daniel Gros, an economist and director of the Center for European Policy Studies, a think tank in Brussels. As for erstwhile Bundesbank warnings that the credibility of the euro would be at risk from slipshod public finances, notably in countries on Europe’s Mediterranean rim, Gros sees no reason to fret over either of the newcomers even if the European Commission says Malta in particular needs to continue its efforts to reduce a still high deficit. «What fear? There’s little danger for the eurozone,» says Gros. In any case, the Club Med debate took place before the euro was launched by 11 countries including Italy and Spain as well as their more northern neighbors of Western Europe in 1999. That was a period when the Bundesbank was the central bank everybody deferred to, whereas now it’s the Frankfurt-based European Central Bank (ECB). Nearly nine years on, Greece has long joined and now Slovenia too, giving the currency bloc a progressively more southern flavor, even if the heavyweights remain Germany and France. Now it’s the turn of Nicosia, which is three times closer to Baghdad than to Brussels, and Malta capital Valletta, which is as close to Cairo as it is to Frankfurt. Insiders and observers are equally confident that life will be more or less as manageable institutionally as before, be it at the ECB or the Eurogroup, the forum where finance ministers confer on economic strategy. Size, legroom matter The issue is straightforward at the central bank. The ECB has already planned for the years ahead with accords on voting in its governing council, which sets interest rates. A move to the vote-rotation that happens at the US Federal Reserve will eventually happen but it will not be triggered by the move to 15 from 13 eurozone members in January. Change will occur only when the bloc is enlarged further. The Malta and Cyprus central bank chiefs already sit in on ECB meetings, as do their finance ministers at monthly Eurogroup meetings. Now they will have voting rights like the rest, even if the ECB says matters get agreed without voting. Jean Pisani-Ferry, head of the Brueghel think tank and also a one-time adviser to French former Finance Minister Dominique Strauss-Kahn, says adding more countries is not a problem as long as everyone cuts their cloth to measure. «Size matters,» he says. «Not only because there are more people around the table, but because it affects the nature of the discussion.» «Large countries’ behavior has a bearing on the euro area as a whole. This cannot be forgotten whenever the discussion addresses substantive policy matters. But unless they become wild, the behavior of small countries matters for them only.» So far, legroom is more of a worry for 2008, it seems. «The only trouble it has caused is a logistics problem,» one insider says of Eurogroup meetings in Brussels, which take place in Room 50.4 of the Justus Lipsius, one of the myriad buildings in the heart of Brussels’s EU quarter. Room 50.4 is where ministers hammered out the eurozone’s new-look Stability and Growth Pact, designed to discipline the management of national public finances and avoid the risk of a Club Med catastrophe which so preoccupied the Bundesbank. It is nothing like as big as the room used when finance ministers of all 27 EU countries meet, but many say those meetings are now too unwieldy to be productive. Slovenia, the last country into the eurozone before Cyprus and Malta, recommends membership, even if inflation is way above target. «Everyone now knows where Slovenia is and everyone knows Slovenia is not linked with high risks because it’s an exemplary member of the euro system and of the European Union,» Slovenian Finance Minister Andrej Bajuk told Reuters in an interview.