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EU membership at 10

Today Malta celebrates its 10th anniversary since it joined the European Union. EU membership has been the most important economic decision taken in recent decades. This historic move offered the opportunity to lock in permanently a competition-friendly environment, remove restrictions on the movement of labour and capital, and pave the way for switching to the euro.

Malta’s standard of living has improved: in 2004 this was 20 per cent below the average of the current 28 member states, but by 2012 (latest available Eurostat data), the gap narrowed to 14 per cent. Indeed the country’s growth performance in recent years has compared favourably with that of other countries, particularly in view of Malta’s resilience in the wake of the global financial crisis. This is also in line with standard economic theory which maintains that countries with a lower standard of living are able to grow at a faster pace than the richer countries, thereby converging to similar standards of living.

EU membership has attracted new areas of activity, such as in remote gaming and in financial services. The ability to operate from a relatively low-cost country, supported by good infrastructure, skilled workforce, the use of the English language and no restrictions to provide services to other member states has indeed proven to be a winning mix. The Maltese market is too small to be attractive to foreign companies. Malta can be a recipient of foreign direct investment because companies are able to export easily to the other member states without facing any tariff barriers.

Even other more traditional sectors like tourism benefited from EU membership. Travel became easier. Although a significant contribution stemmed from the advent of low-cost airlines, independent of EU membership, sharing a common currency undoubtedly offered a competitive edge over non-eurozone countries, as tourists are spared the hassle of having to exchange their currency.

Economic policymaking has also been radically transformed. Gone are the days when policies were inward-looking with the excuse of Malta being a sui-generis country. Would the country have been able to maintain a low fiscal deficit without the European technocrats acting as watchdog? Would the country have scaled down the subsidies to loss-making activities if this were not forbidden by the EU state aid rules?

The economists’ preference for EU membership can be framed into the rules-versus-discretion debate, a rule-based system (of which EU membership is a prime example) which helps resolve problems of inconsistency in economic policymaking.

EU funds have also enabled the country to focus its investment activities on areas which before used to receive lower priority, such as the environment. Funds also facilitated the necessary upgrading of infrastructure, particularly with regards to the road network. In times of fiscal austerity, investment activity is often the first to be sacrificed, and hence, ensuring that funds are associated with investment projects, helped mitigate this problem.

The labour market has shown remarkable flexibility. The workforce was able to absorb the shock emanating from increased competition. Indeed the unemployment rate in Malta remained at low levels, particularly when compared to the other member states.

Would the country have scaled down the subsidies to loss-making activities if this were not forbidden by the EU state aid rules?

Declining industries were replaced with flourishing sectors, also with the help of adequate training. The recent increase in the number of Europeans working in Malta is nonetheless a signal that the free movement of labour works both ways, as not only Maltese were able to get good jobs abroad, but foreigners are now also competing for the job opportunities in Malta. While in some cases this may be due to skill shortages in Malta, there is a growing element where the determining factor is the fact that foreigners may be willing to accept inferior working conditions than the Maltese.

Looking ahead, Malta still needs to become truly European. The country is still in a phase where it takes an active interest in matters directly concerning it, such as burden sharing on immigration and the amount of EU funds to be allocated to the country.

However, the EU project is much more than this. It is a project which kick-started at the end of World War II, when countries realised that economic and political cooperation is the best solution to preserve peace and generate prosperity. The success of this project is confirmed by the number of countries which over the years have joined the EU.

As Malta’s EU membership reaches adolescence it is necessary for the country to take a more active role in EU-wide matters. When will Malta be ready to advocate for higher environmental standards, for stronger employee rights, for more harmony in European welfare and taxation systems, rather than being the passive absorber of visions put forward by the other member states or the EU Commission?

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