Second, the impact of the financial crisis was mitigated by the strength of the domestic banking system, underscored by the absence of toxic assets in bank balance sheets, prudent lending policies and a funding structure based primarily on retail deposits. The third factor was the strategy of temporary government assistance targeted to those non-financial corporations (NFCs) that were in difficulty, mostly in the manufacturing and tourism sectors, along with the implementation of some infrastructure projects. Besides limiting the number of potential job losses, this approach proved to be more appropriate in the domestic context than an across-the-board increase in spending whose impact would have been severely weakened through import leakages. The fourth factor was the continuing diversification of the economy towards high value-added services, which have proved less vulnerable to the downturn. Small businesses have featured prominently in this process. Indeed, most of the enterprises in the emerging sectors of the economy, such as those in pharmaceuticals, remote gaming, ICT and business and financial advisory services are SMEs. Going forward, the prospects are for only slow growth in Malta’s external demand. While IMF projections suggest that global activity and trade volumes will expand by around 4% and 6% this year, respectively, the recovery in the euro area promises to be less robust and more gradual than in other advanced economies, and is expected to be conditioned, inter alia, by the ongoing process of balance sheet adjustment in both the private and the public sectors.
The rise in the surplus savings of the rest of the world, the relative ease with which those savings now move across borders, and the increase in the relative attractiveness of claims on the United States together may suggest the world can sustain larger imbalances, more easily, for a longer period of time. These factors, however, do not alter the fundamental judgment that our external position is unsustainable and the adjustment process ahead could materially affect future economic outcomes. The fact that these imbalances might be sustained for some time shouldn’t make us more confident that they will be. Even if we could be confident that the world would be comfortable financing the United States on these terms going forward, that would not make it prudent for the U.S. to continue borrowing on this scale. Time doesn’t necessarily help. The longer these gaps continue to build, the greater the risks, and the more difficult their resolution. What can we do to mitigate these risks? For the United States, these challenges put a premium on putting in place a more credible fiscal policy framework, maintaining as strong and resilient a financial sector as possible, and preserving an open and flexible economy. These things are all important and desirable, but they are more important, and we can less afford to tolerate any erosion, than would be the case if we were closer to a sustainable external position.