Malta has joined a small club of member states whose finances are considered by the EU to be unsustainable in the long term and which must make "urgent" painful reforms.

In its annual publication on the state of public finances in the Economic and Monetary Union (EMU), published yesterday in Brussels, the European Commission's Directorate General for Economic and Monetary Affairs placed Malta in a group of 15 member states "facing the largest sustainability challenges" as their public finances will in the long term be "characterised by a very significant age-related expenditure".

In these countries, "the increase in government spending in ageing-related categories is likely to be very significant (seven percentage points of GDP or more)" and "immediate reforms in pension and healthcare expenditure are necessary," the report says.

"The reforms to the pension and healthcare system, which will not adversely affect the recovery of the member states' economies, should be approached with urgency.

This is particularly the case for countries (Malta included) where age-related expenditure is a significant source of unsustainability," the Commission notes.

In the same boat with Malta are countries like the UK, Greece and Spain, now in the headlines for being in financial trouble, as well as Ireland, Cyprus, Latvia, Lithuania, the Netherlands, Romania, Slovenia and Slovakia. They also include Belgium, whose public service weighs heavily on the country's economy, the Czech Republic, and France, which also have problems with an overwhelming welfare system.

This is not the first time that Malta's long-term sustainability of public finances has been called into question, not only by the EU but also the International Monetary Fund.

The EU has in the past also called for immediate and radical reforms in the pensions and healthcare departments. So far, the government has made cosmetic changes and the expenditure bill related to healthcare and pensions continues to balloon every year.

The good news is that Malta's prospects in the short-term appear to be in better shape. In fact, the report says that Malta is on the road to reducing its structural deficit once again to within the EU limits after surpassing the three per cent GDP threshold in 2008 and 2009.

Moreover, Malta's general government deficit ratio is targeted to broadly stabilise in 2010 (at 3.9 per cent of GDP). At the same time, gross government debt would peak at almost 69 per cent of GDP in 2010 and thereafter decline marginally.

A new assessment on whether Malta is meeting its obligation to rein in its deficit will be made after mid-August.