In a speech I delivered last year, I had shown how Malta’s competitiveness lags behind that of EU member States, mainly because of restrictive practices and other labour market inflexibilities; the maintenance of monopolistic situations in economically strategic areas such as transportation and inland freight; and insufficiencies in our educational system and innovation efforts. These conclusions have been supported by a number of studies since then and remain valid today. Problematic as it is, however, the budget deficit is by no means the only determinant of macroeconomic imbalances. Certain systems and practices which create demand without generating output have equally harmful consequences. A typical example is the welfare system. It has become so entrenched that its benefits are mistakenly considered to be immutable rights; but, as the rapidly growing welfare gap shows, it is a system which carries the seeds of its own destruction. For while the welfare state was born from the noble premise that care for the weak and the needy is the responsibility of society as a whole, in Malta the terms “weak” and “need” are defined very liberally. In so doing, we overlook the fact that generous welfare depends on two details of demography and politics: that there are enough people of working age to fund the claims of those defined as being weak and in need; and that working people are indeed willing to pay the necessary taxes. If these conditions are not met, there can be no other solution but to redesign the welfare system according to the funds available.
The fiscal deficit, on the other hand, represents a significant hurdle as it is currently about double the 3% of GDP limit. Related to the deficit is the size of the public debt, which exceeds the 60% threshold. The main determining factor in the timing of the adoption of the euro, therefore, is the speed with which fiscal consolidation can be achieved, bearing in mind that the euro area will not technically be in a position to accept newcomers before 2007. If the Government embarks on the relatively fast track of fiscal consolidation implied by Malta’s Pre-Accession Economic Programme, we would need to enter ERM II in 2005. Should this track be chosen, however, it would be vital that the planned pace of consolidation be maintained. In this way the benefits of an early adoption of the euro would be reaped, and the lira’s stay in ERM II would be  BIS Review 50/2003  5  smooth, with no noticeable shocks in the transition from the current basket system to the single currency. If, on the other hand, there are slippages in the rate of fiscal consolidation, the stay in ERM II would have to be prolonged and the adoption of the euro postponed. This would attract negative attention from the international financial markets, resulting in a reduced credibility of our economic policy and in pressures on the exchange rate and the interest rate.