Sunday, 6 June 2010

EU: Stability programme Malta

Stability programmes for eurozone countries on the one hand, convergence programmes for member states still without the euro.

You can start by reading the background remarks on economic policy coordination in the European Union, in the blog post EU: Useful stability and convergence programmes? (3 June 2010).

You can then move on to the EU Council opinion on the stability programme of the euro area country Malta, published in the Official Journal of the European Union (OJEU):

COUNCIL OPINION on the updated stability programme of Malta, 2009-2012; OJEU 3.6.2010 C 144/1

Economic background

On 26 April 2010 the EU Council examined the updated stability programme of Malta, which covers the period 2009 to 2012. The Council began its assessment with a brief description on the economic situation:

The global crisis has affected Malta chiefly through the trade channel, with the impact on the financial sector remaining contained. In 2009, economic activity contracted as exports, but also investment, contracted sharply, while private consumption is estimated to have been relatively stable on the back of resilient employment and some recovery measures in line with the European Economic Recovery Plan (EERP). The concomitant severe drop in imports is estimated to have led to a significant narrowing of the external deficit in 2009.

The impact of the downturn and some non-recurrent expenditure-increasing items in 2008 led to a significant widening of the general government deficit in 2008-2009 compared to 2007. Against this background, and taking into account the high debt ratio, the Council decided on 7 July 2009 on the existence of an excessive deficit in Malta and, on 16 February 2010, adopted a recommendation to correct this situation by 2011. In addition to restoring a sound fiscal position and improving long-term fiscal sustainability, given the expected increase in age- related expenditure, Malta faces the challenge of strengthening competitiveness to improve the economy's resilience to future external shocks. This will require, on the one hand, raising human capital, unlocking business potential and continuing efforts to move towards higher value-added activities and, on the other, promoting an efficient wage setting process that allows a close link between wage and productivity developments.

Council recommendation

After a detailed discussion, and in the light of the recommendation under Article 126(7) TFEU of 16 February 2010, the Council of the European Union invited Malta to:

(i) achieve the 2010 deficit target of 3.9 % of GDP, if necessary by adopting additional consolidation measures; back up the strategy to bring the deficit below 3 % of GDP in 2011 with concrete measures while standing ready to adopt further consolidation measures in case risks related to the fact that the macroeconomic scenario of the programme is more favourable than the scenario underpinning the Article 126(7) recommendation materialise; and considerably strengthen the strategy for 2012 to ensure an adjustment towards the MTO [medium-term objective] in line with the requirements of the Stability and Growth Pact; seize, as prescribed in the EDP [excessive deficit procedure] recommendation, any opportunity beyond the fiscal efforts, including from better economic conditions, to accelerate the reduction of the gross debt ratio towards the 60 % of GDP reference value;

(ii) in view of the significant projected increase in age-related expenditure, improve the long-term sustainability of public finances by implementing further reforms of the social security system;

(iii) strengthen the binding nature of the medium-term budgetary framework and improve the monitoring of budget execution throughout the year, and enhance the efficiency of public spending, especially in the area of health.

Malta is also invited to provide more information on the broad measures underpinning the envisaged consolidation measures in the EDP chapter of the stability programme.

Eurozone financial stability

On 31 May the European Central Bank (ECB) published its Financial Stability Review June 2010, which assesses the stability of the euro area financial system both with regard to the role it plays in facilitating economic processes and with respect to its ability to prevent adverse shocks from having inordinately disruptive impacts (page 7).

The Financial Stability Review (225 pages) offers a view of the inter-related financial markets and the consolidation measures of eurozone governments.

The Euro Group plays an important part in the efforts to restore fiscal stability in the euro area. Its president is Jean-Claude Juncker, the prime minister of Luxembourg, where the next meeting is going to take place Monday, 7 June 2010.

Ralf Grahn