EU unlikely to penalise Malta for excessive deficit

Malta is likely to avoid EU disciplinary measures over its growing structural deficit as Brussels is considering this year's surge as a "one-time" problem.

Although Malta is expected to break the EU's financial and monetary rules this year by reporting a deficit of more than three per cent of GDP, the European Commission believes that the situation will be adjusted next year, a Commission spokesman told The Sunday Times.

Brussels will draw up a report when it receives the official data from Malta for 2008. It will then decide whether to recommend the opening of an excessive deficit procedure, the spokesman explained.

"However, we want to underline that from our forecasts it seems that the structural deficit problem in Malta this year will not be repeated in 2009. If this is the case, the Commission won't be recommending starting corrective measures."

When the three per cent of GDP benchmark is breached, the EU normally takes corrective measures against the member state concerned through a mechanism known as the Excessive Deficit Procedure. This sets strict timetables and new targets to be observed in order to rein the deficit back to the EU's threshold.

The corrective measures decided by EU Finance Ministers are monitored on a monthly basis by the Commission. If a member state does not follow the recommendations, it risks being fined and losing some of its EU funding.

The Commission's spokesman said that according to its forecasts, Malta will this year end up with a budget deficit of 3.8 per cent, two percentage points higher than forecast.

The main reasons for this surge according to the EU executive are one-time expenses, such as the Malta Shipyards privatisation which is costing €56 million in grants under early retirement schemes.

"However, we are predicting that next year's deficit will again fall to 2.7 per cent and will put Malta back into the fold," the spokesman said. Although showing a similar trend, the government's forecasts are more optimistic than the Commission's.

According to the last budget estimates, Malta is to end this year with a deficit of 3.5 per cent, up from a projected 1.2 per cent. However, the government is planning to reduce its deficit to 1.7 per cent next year, one per cent lower than the EU's forecast.

The EU had imposed an Excessive Deficit Procedure against Malta in 2004 as its deficit upon accession was still at 10 per cent. However, following strict budgetary controls, the deficit was reduced to below the three per cent threshold in 2003 to pave the way for Malta's entry into the eurozone.

Member states with deficits of more than three per cent of GDP are not allowed to introduce the euro.