2  BIS central bankers’ speeches  The sharp rise in the monetary base reflects the scale of the injected liquidity. On the other hand, the banks’ tendency to hold on to their liquidity has resulted in a growth rate in bank loans (and investments) that is considerably slower than that of the monetary base. The result is that the growth rates in bank loans (represented by the green line in the chart) as well as in M3 have been substantially slower than that in the monetary base. A return to a fully functioning monetary transmission process will increase the volume of lending that would support the resumption of economic growth. This, however, remains a challenging task while tensions continue in the sovereign debt markets. Importance of a prudent fiscal policy The creation of the euro reduced the cost of borrowing, as credit spreads narrowed and the exchange rate risk on intra-euro area borrowing was eliminated.1 The reduced cost of financing public as well as private debt led to higher government debt and private sector leverage. With the benefit of hindsight, it is clear that the first seven years of the euro would have been an ideal time for governments to engage in fiscal consolidation. Instead imbalances and vulnerabilities were further aggravated. 2 In some Member States, institutional characteristics also played a major role.
Still, further steps could be taken to improve productivity levels and increase the employment rate. Also, as I argued recently, COLA increases should not be superimposed on wage increases agreed in collective agreements, but should form part of the negotiation process, so as to ensure that firms are able to match all wage increases with productivity increases. Faster productivity growth depends on many factors, including investment, the infrastructure, the quality of the human resources and  BIS central bankers’ speeches  7  hence the quality of the educational system and its ability to meet the skills requirements of a growing economy. Measures that increase the employment rate could include further policies that incentivise a higher female participation rate, as well as measures that facilitate more flexible work conditions, including part-time employment. A further requirement for economic growth is the smooth functioning of the financial system. Particularly during these turbulent times, continued economic growth depends also on the uninterrupted supply of credit by the financial sector to firms and households, and to that end the stability of the financial system is essential. It is important to note that although its rate of growth has declined, bank credit has continued to increase in Malta, unlike the situation across the euro area, where widespread deleveraging by financial institutions has led to a contraction in the volume of credit, as shown in Chart 7.