13 October 2004

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EU report shows Malta’s euro odyssey is a tough quest

By Matthew Vella reporting from Amsterdam

The euro is five years old, and at the Euro Conference being held in Amsterdam this week its guardians have lauded the toddler currency’s first steps towards a greater European economic growth. The keyword is, however, ‘credibility’, bandied about by Joaquin Almunia, the EU Commissioner for economic and monetary affairs, and former European Central Bank president Wim Duisenberg.
No surprises, critics say, after the Eurozone’s Stability and Growth Pact – the fiscal regulations which supposedly dictate eurozone countries’ budgetary priorities – was scorned by none other than the fervent supporters which had it put in place the first time round, France and Germany.
Member States seeking to join the euro will have to ensure they can guarantee deficits below a ceiling of three per cent of GDP, and a level of public debt of 60 per cent of GDP.

Malta’s progress towards joining the European single currency is set against this ominous background – the island will have to achieve sustainability in its public finances. “A lack of fiscal discipline can lead to disaster,” Witold Grostel, an expert from the National Bank of Poland, warns of the new Member States’ odyssey for joining the Euro. And budget consolidation in Malta should also be carried out responsibly given its high fiscal imbalance – rushing into the Euro could lead to a slowdown in convergence. Countries with high deficits such as the Czech Republic have in fact already postponed their intention to join the Euro to 2010.
With Malta facing an impending pensions ‘time-bomb’, when by 2025 the working population would have decreased radically and will have to support an ageing population and a social welfare system, many argue that adherence to the Euro’s fiscal framework and its strict rules to keep deficits and debt low should be rendered more flexible.
New Member States facing similar pensions crises are, however, taking stock of their future welfare liabilities by actually costing future costs now – a task which Maltese commentators attending the Euro conference say has not yet been taken very seriously by the financial authorities. “By taking stock of the island’s future liabilities,” one expert pointed out, “such as the increase in pensioners and the decrease of births, we can deduct that this trend means no new schools should be built, for example. So there is a way where we can curb some public expenditure. But these trends have to be taken seriously.”
Malta is dubbed by a European Commission report entitled ‘EMU after 5 years’ as having made little progress in reforming the first pillar of its pension scheme. With its high debt level, Malta is not yet in a good position to cope with the budgetary impact of its ageing population.
EU figures confirm much of the comments which Maltese commentators in Amsterdam have noted about the current economic scenario – with GDP growth in 2003 at a meagre 0.4 per cent and a deficit ballooning to 9.7 per cent of GDP, there is a greater need to increase national output by giving the private sector more elbow room, without being hampered by excessive costs and public sector bureaucracy. But with rising labour costs and other nasty government ideas, such as the ill-conceived consumption tax, disguised under the pretence of an eco-tax, increasing business profitability and national output remains a stuttering process.
Unfortunately, the EU statistics seem to confirm Malta has failed to move on beyond its basic problems. Facing the brunt of the competitive edge which North Africa, Eastern Europe and China have with their cheaper labour in the manufacturing sector, the island has not done anything substantial to move towards a more value-added economy – foreign direct investment inflow in 2002 decreased by 10.6 per cent, according to the EU report, being the only new Member State to fall behind that year. Additionally, the island’s investment in research and development remains negligible; post-secondary and tertiary graduates, at 3.7 per cent of the population aged 20-29, is one of the lowest; and in graduates in science and technology Malta ranks the second lowest after Cyprus with 0.37 per cent of the population aged 20-29.
But Malta also faces more challenges. It has already been issued with excessive deficit procedures as part of the six new Member States whose expenditure is of concern to the European Commission. Joaquin Almunia warns that the European Commission will not shy away from imposing penalties to unwilling EU members, even though the Commission’s ammunition has proved weak with France and Germany. “We also have another form of ammunition which is not automatically linked to the pact. The Commission can suspend cohesion funds to these countries, although it has never been tried before.”
Reformers of the strict Stability and Growth Pact are appealing for a strengthening of the pact by making it a ‘clever’ one – adjusting the rules for a more flexible approach to governments which flout the deficit and debt ceilings, but also reward those countries which behave prudently during the “good times”. France and Germany were due to be penalised by the European Commission when they flouted the pact, but refused to comply – today the pact has been suspended and is now up for review. So the answer, Grostel says, is to remove the one-size-fits-all policy.
“It is like giving one speed to a number of different drivers with different ages, cars and driving skills… that can lead to different accidents,” Grostel says about those Member States which, when faced with difficult economic times and rising unemployment, often need to inject more money in the economy to keep demand as stable as possible, and that often means bursting through the pact’s ceilings. One of the lessons from the last five years of the Euro is that fewer than half of all Member States actually complied with the objective of achieving a balanced budget or surplus.
Director general of the DG Economic and Financial Affairs Klaus Regling believes the fiscal rules behind the Euro should also be more discretionary, taking into account differences between countries in terms of their debt levels, economic growth and long-run demographic trends: “By relying on an excessive interpretation of the existing rules, we cannot guarantee equal


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Editor: Saviour Balzan
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