Malta joins euro zone

VALLETTA (Reuters) - The Mediterranean island of Malta became the smallest member of the euro zone at the stroke of midnight on Tuesday.

The former British colony of some 400,000 people qualified for euro adoption after cutting its budget deficit from almost 10 percent of gross domestic product in 2003 to just over 2 percent.

It successfully overcame a last-minute struggle to rein in inflation caused by galloping oil prices, and in November Malta's annual inflation rate, at 2.9 percent, was running slightly below the euro zone average of 3.1 percent.

A Euro Changeover Committee has successfully allayed fears of inflation caused by euro adoption by reaching price-freeze agreements with most importers and retailers.

Prime Minister Lawrence Gonzi and Malta Central Bank Governor Michael Bonello crowned the moment by withdrawing euro banknotes from an ATM.

"This is a historic day in the life of the country and if we face up to the challenge and exploit the new opportunities which monetary union offers, the step we are taking today should lead to stronger, more sustainable economic growth," said Bonello.

Malta and fellow Mediterranean island Cyprus became the 14th and 15th countries to enter the euro zone, having joined the European Union in 2004 with eight other countries.

Malta's exchange rate has been fixed at 0.43 lira to the euro since it joined the European exchange rate mechanism in May 2005.

Euro zone states are Malta's most important trading partners and euro adoption is seen benefiting its large tourism sector.

The opposition Labour Party, which had opposed EU membership for Malta, backed euro adoption and a public information campaign has been a widely acknowledged success.

(Editing by Michael Winfrey)