The possibility of a €10 million EU fine will be hanging over the Finance Minister on Monday when he presents the Budget 2011, putting added pressure on him to slash the structural deficit.
EU finance ministers struck a deal on economic governance late on Monday night giving the European Commission the power to impose sanctions on member states with a deficit higher than the threshold of three per cent of gross domestic product. Even states moving towards that level will not be immune from sanctions.
Malta's deficit stands at 3.9 per cent of GDP. Two years ago, when it stood at 4.5 per cent, the island was placed under an excessive deficit procedure and was given until the end of 2011 to bring it back down to within the three per cent limit allowed by the EU's Stability and Growth Pact. If it fails to do so it may be fined 0.2 per cent of GDP under the newly-agreed sanctions.
Malta was on board in Monday's deal, which needs the final seal of approval by EU leaders at a Brussels summit next week. However, Finance Minister Tonio Fenech yesterday admitted his room for manoeuvre in the next Budget would now be tighter as a result of the new EU regime.
"Through this deal, which reinforces the need to have stricter controls over the budgets of member states, all EU member states will have to make sure to stick to the rules. Although this will make our job (as finance ministers) more difficult, we have to avoid at all costs a repetition of what happened in Greece a few months ago," Mr Fenech said.
The new rules give the European Commission more powers of surveillance over national budgets. Brussels will now start placing countries on the path to being sanctioned even if they aren't yet violating the Budget rule and are moving towards the three per cent limit. The Stability and Growth Pact also sets a total debt threshold of 60 per cent of GDP. Discussion on this issue in terms of the new rules has not been concluded although member states are under pressure to cut their debt levels to close to this figure over a number of years.
Member states with debt levels of over 100 per cent will have to reduce it by about 1/20th a year. It is not yet clear how Malta, with its debt standing at about 70 per cent of GDP, will be affected.
The agreement envisions a two-step enforcement process: First, the Commission would designate countries close to or already violating the rules, a step that will require the assent of a qualified majority of EU countries.
The second step will allow the Commission to impose sanctions automatically, unless a qualified majority of countries votes to block such sanctions.