There is a further consideration that I have raised on previous occasions – one that would enhance the effectiveness of the intermediation role in our financial system, and address some of the funding gaps, resulting possibly in instances of market failures. Malta lacks a 4  BIS central bankers’ speeches  consistent supply of long term finance that would efficiently fund a project addressed to SME funding needs or to finance structural, economic, social and environmental policies in connection with the long term financing of priority projects. If we look at other countries, such as Germany and France, they managed to cater for SMEs as well as for other environmental and infrastructure investment through promotion or development banks. A development bank would contribute to economic growth by funding sectors and projects that are not catered for by commercial banks on their own. The Central Bank looks at such an initiative as a necessary diversification of our financial base. I understand that progress is being made on this initiative and I find this to be a very positive development. The road ahead Against a rapidly changing economic landscape, Malta needs to be attentive to take advantage of its flexibility and adaptability. In the past years, the Maltese economy went through significant structural change. Not only by diversifying into a number of new growth sectors such as aviation services, pharmaceuticals and internet related activity, but also by upgrading its investments in the traditional sectors.
This process of rationalization, which occurred only a few years before the start of the crisis in 2008, made the overall economy resilient and in a better position to weather adverse events in external markets. Post-2008 growth was enabled by the smooth entry into the Euro area, which coincided with the start of the crisis in 2008. The transition was facilitated by the fact that in the preceding decades, there was no recourse to monetary financing of government debt, generally no recourse to currency depreciation to offset internal competitiveness issues, while fiscal policies were in large part prudent. BIS central bankers’ speeches  1  Another consideration relates to the growth of new sectors which improved the capacity of the economy to offset downturns in external demand. Diversification is often more difficult to achieve in relatively small economies. However, the degree of diversification in the private sector in Malta is remarkable, and has resulted primarily from the growth of financial services, internet related services and aviation servicing, along with the reorientation of both the tourist sector and manufacturing. Although we have experienced higher GDP growth, we must be aware that some of our competitors are starting to benefit from the structural reforms and internal devaluation that they went through in response to the impact of the financial crisis on their economies. Chart 2 displays unit labour costs in the Euro area since 2002, distinguishing between the stressed economies and the relatively unstressed ones. The path of Malta’s ULC is displayed separately.