One of the key messages of the pre budget document published by the government last month was that fiscal consolidation has continued throughout 2006, and by the coming budget, later on this year, the government is likely to announce that it has managed to rein in the fiscal deficit to a sustainable level. The pre budget document also mentions a number of reforms that the government is considering to implement in order to maintain this sustainability, as well as to improve the economic climate in the country, to help firms operating here to sustain their competitive advantage.

Stability in the economic system is at the top of the wish list for any government. Unfortunately, it is not that easy to achieve because when one speaks of stability in relation to a country's economy, one is making reference to a number of variables, which may not always move in synch with each other. Price stability is critical and this is why central banks make it a point to keep inflation under control as far as this is possible. Currency stability is another important goal because it removes risks, especially in a country like ours that is highly dependent on international trade. The interest rate is by far the most important tool to achieve, both price stability and currency stability, even if a healthy balance of payments goes a long way to support a country's currency.

Then there is the need for stability in public finances. Stability in public finances is necessary to be able to sustain a healthy employment policy, but also to sustain over the long term public expenditure in various activities such as health, education and social security. Fiscal deficits could bring about a surge in economic activity, and consequently in employment, but very often these benefits are only enjoyed in the short term. It is also discovered fairly soon that, in order to pay for the fiscal deficits, public expenditure on essential items would need to be curtailed.

All this shows how difficult it is to achieve healthy economic growth rates, reduce unemployment to a minimum, keep inflation under control, have a healthy balance of payments position, maintain currency stability, while balancing the budget and still achieving the social objectives one would have set. To achieve all this, one also needs to have flexibility in the economy. However, to have such flexibility, one needs to effect a series of reforms in the economy. This is in effect what the government is seeking to achieve - fiscal and monetary stability while effecting the required reforms to make the economy more flexible.

The 64 million dollar question is whether stability and flexibility can go hand in hand, or is there a trade off between the two? Is it a chicken and egg situation, where one is followed by the other but one does not know which comes first? Or are the mutually reinforcing, that is one feeds on the other, thereby making it critical for the government to have both at the same time? As we move towards the adoption of the euro as our national currency, having economic flexibility becomes one of the key determinants of economic success. However, can we pursue all the necessary reforms all at once to attain the flexibility we require?

These questions are relevant because the experience of some countries, such as Italy and France, has shown that it is difficult to achieve stability and effect the required economic reforms at the same time. The experience of a country such as Sweden shows something totally the opposite.

In the case of Malta, the reforms we are talking about are pension and welfare reforms (to sustain social cohesion in the long term), tax reform (not tax relief), dismantling of public and private monopolies or cartels (as these eventually lead to inefficiencies and higher prices for the end user), wage settlement reform (that is linking wage increases to productivity increases to maintain competitiveness). These all have a direct economic impact. Then there are other reforms that need to be effected in the administration of the public sector, the regulatory authorities and the education system that would render them leaner and more responsive to today's needs, and would therefore have an indirect economic impact. The end result of all such reforms would be a more flexible economy.

We cannot run away from any of these reforms and the pre-budget document does attempt to address them, some in greater detail than others. We cannot wait to finalise the fiscal consolidation process before we start implementing the necessary reforms. We need these reforms sooner rather than later while we maintain fiscal and monetary stability (the former through the budget measures and the latter through the monetary policy as implemented by the Central Bank of Malta).

Economic stability and economic flexibility go hand in hand and are mutually reinforcing, and as such the country's economic policies have to be geared for the attainment of both. It may be painful in the short term, but definitely more rewarding in the long term. Unions and the organisations representing the business sector need to understand this, and must be bold enough to embrace such a strategy. Difficult but most definitely necessary.