Antonio Afonso, Ludger Schuknecht and Vito Tanzi, Public Sector Efficiency: Evidence for New EU Member Sates and Emerging Markets. ECB Working Paper No 581 (2006). 2  BIS Review 113/2006  result, the 6% of GDP allocated to capital spending had to be funded almost entirely by additional borrowing, which gives rise to further debt-servicing costs. Repeated year after year, this pattern pushed the debt/GDP ratio steadily upwards to a peak of 75% in 2004. This tendency for recurrent revenue to be matched by recurrent expenditure in the context of fiscal retrenchment has had a crowding-out effect on investment, and partly explains why the country’s investment/GDP ratio has been static at best in recent years. A more telling indicator of the relatively small investment in productivity-enhancing activities is the share of GDP devoted to R&D, 0.6% in 2004, compared with an average EU ratio of about 2%. It is doubtful whether the existing pattern of resource allocation is conducive to the desired improvement in Malta’s international competitiveness. The latter can only be achieved by increasing the size, flexibility and skill level of the labour force, while simultaneously creating an institutional and physical infrastructure more likely to attract high value-added foreign direct investment. And since the State must play a leading role in this effort, the question of financing arises spontaneously. Now in the context of a fiscal consolidation process that has not yet run its full course, increasing recurrent spending beyond the natural creep caused by existing commitments such as pensions is clearly not an option.
But history is full of stories of reformers who made progress, declared victory, and paused, only to find their accomplishments threatened or reversed. For the post-crisis reforms to be durable, we cannot rest on our laurels – we have to keep learning and adapting. CCPs should keep themselves central by again being part of the solution. Over the past two years, two episodes of extreme market stress caused by external factors have tested the system: first, a once-in-100 year pandemic and second, the unprovoked invasion of Ukraine by Russia. We should use the lessons from those episodes to make central clearing stronger. Global Pandemic – Spring 2020 In early 2020, the COVID-19 pandemic sparked a ‘flight to safety’ by investors, with considerable volatility across asset classes, including government bonds. We saw the biggest two-day price  Page 3  moves for some cleared products in the past decade. [1] Thankfully, the financial system entered the pandemic in a much stronger position than in 2008, with at least $ in additional collateral against over the counter (OTC) derivative exposures; [2] and a significant increase of central clearing in OTC markets. [3] CCPs in this period functioned as intended. Very significant and sudden changes in asset prices did not lead to counterparty credit risk – actual or anticipated. There were no major clearing member defaults during the pandemic, so clearing was not tested to the limit. But there was no panic about counterparty credit risk, no ructions in the interest rate swap markets.