EU recommendations on reform programme

No assessment of Malta’s economy by the European Commission or by the International Monetary Fund, for that matter, is ever free of warnings. This applies to reviews of other economies as well but in Malta’s case a set pattern seems to have developed with little changes made to the warnings and recommendations made from time to time. It can also be justifiably argued that it takes time to carry out the necessary reforms. This is, of course, true but there are outstanding matters, such as that over the reform of the cost-of-living adjustment mechanism, that have been raised in reports about Malta for a long time.

The Commission has found that Malta’s national reform and updated stability programmes are generally in line with the principles and objectives of the EU’s 2020 strategy. But in its review of these programmes it says the island needs to better define the measures it will take to reach its targets. It made five specific recommendations to be implemented over the 2011-12 period. There would seem to be no difficulty over the first – on the need to bring the deficit in the government’s finances to below the three per cent threshold established by EU rules. Insofar as the deficit is concerned, Malta is in a far better position than that of many other countries.

Even so, the deficit is still higher than the established threshold. The government has said it is determined to bring it down to the required level this year but the Commission wants to ensure the island sticks to its target and has recommended it should “stand ready to take additional measures so as to prevent possible slippages and adopt concrete measures to back up the 2012 deficit target”.

The Commission specifically asked Malta to define these measures and “embed the fiscal targets in a binding, rule-based, multi-annual fiscal framework” as well as improve the way it executes the Budget. It recognised the progress made in reducing the deficit but warned that the slippages of the past should not be repeated. It remains to be said if the restructuring of Air Malta would affect the government’s target but, if it does, the government would need to go deeper into its work to cut spending in other areas.

Only a few days ago, this newspaper commented on the proposals made by the government in the Budget to further reduce spending in the government service. When does the government plan to give an indication of the progress made? The European Commission has also asked Malta to step up its pension reform and recommended that the use of early retirement schemes, used repeatedly in the past years, should be discouraged. Early retirement schemes are resorted to in cases where excess labour would need to be shed in order to save firms in difficulties. The Commission’s recommendation is therefore not quite understood because retaining such labour could well jeopardise the viability of a company.

Raising the employment participation rate is another recommendation frequently made in Commission reports about Malta but, again, this is a slow process though some good progress is being made here too. Maybe one of the hardest nuts to crack is that over the cost-of-living wage adjustment, which the government and trade unions want to retain as, they argue, it has helped keep industrial stability. At least, talks are now being held to “refine” the mechanism but there is no intention to change the concept. Again, what stage has been reached in these talks?