Malta on right track in economic governance

One of the results of the EU summit last December was a reinforced Growth and Stability Pact with a new set of rules for economic and fiscal surveillance, referred to at the time as the six pack.

The two rules that made the headlines were the objective of having a balanced budget enshrined in the Constitution of the member states and the introduction of an automatic sanction for any state that infringed the rules on public finances unless a qualified majority of member states vote against it.

However, in total, there were five regulations and one directive.

One item that had received little attention at the time was the introduction of a scoreboard (very much like a corporate dashboard) that would serve as benchmark against which EU member states would be measured.

Benchmarks are found to be very useful in any enterprise as there is general consensus on the principle that what gets measured gets done.

The 10 variables that have been selected for this benchmarking process are macroeconomic in nature.

My attempt today is to look at these variables and seek to establish where Malta stands in relation to them.

We need to appreciate that some of the data is not readily available and so no comment made be made on certain benchmarks.

Three of these 10 variables are related to our international position, as emerging from our balance of payments. One may think that since we joined the eurozone, the balance of payments have lost their significance.

This mistaken assumption is made because there are those who consider the importance of the balance of payments only in relation to the strength of the currency.

In our case the balance of payments is important mainly because we know that we can sustain economic growth only if it is export-led.

The targets that we have to achieve are that the current account balance should be between +6 per cent and -4 per cent of the gross domestic product, net international investments should not be higher than -35 per cent of the GDP and our export market share should not decrease by more than six per cent.

Data is available on the first two of these areas, and in both cases Malta fits into the benchmark requirement. The current account balance was at -0.2 per cent of the GDP in June 2011 and the net international investments were at + 3.8 per cent of the GDP.

The next three benchmarks have to do with debt, both in the private sector and the public sector.

The level of indebtedness is an important indicator as it provides information about future commitments and the sustainability of current levels of economic growth.

The higher the level, the greater the future commitments are and the less sustainable economic growth is. General government debt is not to exceed 60 per cent of the gross domestic product, private sector debt is not to exceed 160 per cent of the GDP while private sector credit flow is not exceed 15 per cent of the GDP.

Public sector debt is at 69 per cent of GDP and in this regard we are above the threshold, while private sector debt is at around 130 per cent of GDP, which is below the threshold.

One should also point out that this figure is reduced considerably if it is netted off against deposits held in the banking system.

The next set of benchmarks has to do with prices. Higher prices mean a loss of competitiveness for businesses operating in Malta and therefore a major threat for our economy.

In this regard our nominal unit labour costs should not rise by more than nine per cent over three years, house prices should not increase by more than six per cent in real terms, and changes in the real effective exchange rate should be + or -5 per cent.

Nominal unit labour costs have increased by around seven per cent over a three-year period, so well within the benchmark. House prices have increased by around 4.5 per cent, again within the benchmark.

The final variable is the unemployment rate, which should not be more than 10 per cent. Low unemployment is an indication of an economy that is performing well and that is creating jobs.

According to the last Labour Force Survey, Malta’s unemployment rate is of 6.2 per cent. This figure is not only well within the benchmark, but is also one of the lowest in the whole of the European Union.

The problem of the sustainability of the sovereign debt of certain countries (notably Greece), which has led to the fiscal compact, is still with us. It needs to be resolved.

However, the need to stimulate economic growth and reduce unemployment is gradually, but steadily, coming to the forefront. Each member state would have to find its own solutions in this regard.

The use of these benchmarks should provide strong indications as to whether a country is on the right path or not.

The indications about Malta are that we are by and large on the right path – something which should not be taken lightly or for granted.