Even though Malta's economy is expected to start picking up again next year, the Central Bank Governor, Michael Bonello, did not mince words when he warned a few days ago that Malta was experiencing its first major test since it adopted the euro. In his characteristically forthright manner, he said the road ahead was still fraught with challenges. The problem is that, as so often happens, such warnings either fall by the wayside or take time to be well heeded.
Speaking to the Institute of Financial Services, Mr Bonello pointed out that, although the euro area economy had finally emerged from recession in the third quarter, recovery would only be gradual. In Malta, gross domestic product is expected to shrink by about 2.2 per cent this year but, looking ahead, economic activity is expected to pick up over the next two years.
The government is forecasting a growth of 1.1 per cent next year but the European Commission's estimate is lower, 0.7 per cent. Quite correctly, particularly after the general agreement over keeping the system that is in place for the award of the cost-of-living wage adjustment, the governor made a case for the strengthening of competitiveness and for higher productivity all around, arguing, not for the first time, that there was need for the development of a culture "where wage increases reflect higher productivity".
In a comment clearly seen to have been directed at those, including the Finance Minister, who argued that the cost-of-living wage adjustment ensured industrial stability, Mr Bonello said that "any benefit that this mechanism may be perceived to have in terms of stable industrial relations must be weighed against its potential to ratchet price levels upwards, so that the initial improvement in earnings may prove to be short-lived". Well said but, as the minister said in his reply, he and the social partners had agreed that dismantling the system "may not be the best course of action after all". Mr Bonello is suggesting the gradual phasing out of the system and its replacement with a productivity-linked wage mechanism negotiated at enterprise level. Time will tell who is on the right track or not, but it would seem that the governor is on firmer ground.
As expected, Mr Bonello also spoke on public finances, strongly arguing for the need to resume fiscal consolidation once the economy starts recovering. At 3.8 per cent, Malta's deficit is much lower than that in other euro area countries, compared to an average of 6.4 per cent, but this should in no way be used as a pretext for any relaxation in the efforts to adopt a continuous prudent approach to the handling of the public purse. It was, and maybe still is, necessary to support firms finding themselves in difficulty in order to save jobs, but with national debt running at 67 per cent of GDP, the country can hardly afford not to be extra careful how to spend the money.
The governor could not have put the size of the problem in a better perspective when he said that the €196 million interest due on the debt next year is equivalent to what the government would spend on medicines in three years at today's prices. This has to be paid out of taxpayers' money, a matter that ought to be kept well in mind by all, particularly by politicians.