Expectations over regular exchange of views with Finance Ministry not entirely met – CBM Governor

Central Bank Governor Michael Bonello, who steps down today after 12 years in office, has said his expectations over a structured and regular exchange of views with the Ministry of Finance on matters of common and national interest “have not been entirely met”.

In an interview with The Times Business, Mr Bonello said: “Upon Malta’s accession to the EU, and more so since we adopted the euro, I hoped that a structured and regular exchange of views would take place with the Ministry of Finance on matters of common and national interest.

“After all, under the Central Bank of Malta Act, the Bank is required to be an advisor to the government. My expectations in this regard, however, have not been entirely met, especially during the past three years of financial crisis. I still think such a dialogue is important.”

Mr Bonello also said that during his years as Governor he took a firm stand in defending the Central Bank’s independence, “as required by the Treaty and our own Central Bank of Malta Act”, while increasing its accountability through the creation of an Audit Committee, expanding considerably the explanatory information supporting the Bank’s annual accounts and reporting regularly to Parliament.

Mr Bonello, who is Malta’s longest serving Governor, said European Monetary Union was not accompanied by the required degree of economic integration and the fiscal rules were largely disregarded such that debt levels rose dangerously to the point that we now have an acute sovereign debt crisis.

He described the period since 1999 for Malta as being “one of generally rising living standards and increased social cohesion against the background of an economy which responded to the competitiveness challenge posed by globalisation by investing in high value-added activities and becoming more services-oriented.”

However, he said that incomes in Malta did not grow as fast as in the EU on average, and “Malta’s economic growth has been accompanied by persistent fiscal imbalances”.

He said EU membership and the adoption of the euro were undoubtedly the main drivers of change at the Central Bank of Malta. He also revealed that the Bank was instrumental in helping the government argue successfully for a permanent derogation on the acquisition of second properties by foreigners during Malta’s EU accession negotiations.

Mr Bonello said that although Malta’s GDP per capita in purchasing power standards has risen from about 70 per cent of the euro area average in 2004 to almost 75 per cent, Malta could and should have done better, as others have.

“This can only happen if productivity increases at a faster rate than in our euro area partners. Over the past decade, growth in unit labour costs in Malta has outstripped that of the euro area, and our higher costs are not justified by the productivity growth differential between the two economies. This implies that our policy focus needs to be uniquely on improving Malta’s international competitiveness through measures that enhance productivity,” he said.

He added: “Fiscal consolidation is also of the essence to enhance competitiveness, especially if the strategy is based, as it should, on expenditure restraint rather than higher taxation. There is a clear need to reassess social welfare programmes, most notably in respect of health, education and old-age expenditure, to ensure their sustainability, reduce waste and to target them to those who are most in need. The Greek crisis is a stark reminder of the harsh consequences of fiscal profligacy and living beyond one’s means.”

Mr Bonello described the past 12 years as being a source of great satisfaction and said he was proud to have contributed to Malta’s successful journey to EU membership in 2004 and to the euro less than four years later.

He said his work in the Governing Council of the European Central Bank was “the highlight” of his career.

“It has been intellectually challenging and rewarding. Under the enlightened leadership of President Jean Claude Trichet, the Council has successfully delivered upon its price stability mandate, acting with full independence as the guardian of the common currency of the second-largest economy in the world,” he said.