A new Competitiveness Pact for the euro area, which obliges its members to improve coordination of their fiscal and economic policies, has been drawn up after tough negotiations in Brussels.
By consenting to the pact, originally proposed by Germany and France, Malta has committed itself to tough reforms on taxation, wages, pensions and budgets in the coming years.
However, with the help of Ireland and other small member states with common interests, Malta has so far managed to fend off attempts by Germany and France to introduce a forced harmonisation of corporate tax across the EU.
There is also still no obligation to abolish the established wage indexing mechanism, known as the Cost of Living Allowance, tying salary increases with inflation.
Although the pact clearly says that member states should move away from these practices, the areas still remain within the competence of individual member states.
The Commission is, however, still expected to press these issues and will soon be presenting a proposal for the establishment of a Common Consolidated Tax Base.
“We think that overall the pact will contribute to a stronger euro,” Prime Minister Lawrence Gonzi said at the end of the talks, which ran into the early hours of yesterday morning.
“It is in Malta’s interests to continue carrying the necessary reforms in order to assure a sustainable economic future for the island,” he said.
According to the new pact, all 17 eurozone member states will have to make concrete annual commitments to be implemented over a 12-month period aimed at boosting competitiveness, employment, public finances and financial stability.
These measures should pay particular attention to increasing indirect taxes, reforming wage bargaining systems, hiking retirement ages and introducing government spending and debt breaks.
Member states will have until the end of April to make their first formal annual set of commitments. It will be up to individual member states to choose what commitments to make, though the Commission will be ensuring these are effectively put in place as committed.
In addition to the Competitiveness Pact, the 17 eurozone leaders agreed in principle to boost the effective lending capacity of the area’s bailout funds.
They also agreed on how the loans already given to and Ireland could be revised to make them less punitive.
However, any such easing of the interest rate or the length of loans would be conditional on meeting other demands.
Pact’s main points:
Employment: Promote ‘flexicurity’, lifelong learning and shift taxes from wages to indirect charges on consumption.
Public finances: Align retirement age with life expectancy, limit early retirement (especially in 55 to 67 age group); bring in legally binding public debt and expenditure curbs.
Competitiveness: Adjust wage- setting mechanisms, including indexation where necessary, and align public and private sector wages.
Tax coordination: Harmonise tax bases, not rates, by enhanced cooperation if needed.
Financial stability: Conduct regular bank stress tests and set up resolution regimes.