EU Economic and Monetary Affairs Commissioner Joaquín Almunia indicated yesterday that the European Commission is considering dropping its excessive deficit procedure against Malta.

The decision is based on the observance that the country has brought its deficit down to below the three per cent of gross domestic product (GDP) threshold, as stipulated by the EU’s stability and growth pact.

The procedure had been launched by the EC shortly after Malta joined the EU in May 2004.

Almunia also indicated the procedure would be dropped against Germany and Greece.

The EC will decide on the matter on 16 May, the same day it is due to give its final opinion on Malta’s euro currency convergence.

If the decision is positive, this will be the first of the final clearances to be obtained by Malta to adopt the euro on 1 January, 2008.

Yesterday’s announcement may be indicative of the Commission’s train of thought regarding Malta’s prospective eurozone membership and holds a certain amount of weight as a preliminary forecast of the EC’s final opinion.

Speaking on Sunday, Prime Minister Lawrence Gonzi had expressed confidence that the EC would be issuing a positive verdict on Malta’s euro application, given the improvement registered in the country’s finances.

Almunia was speaking yesterday at a press conference on the Commission’s spring economic forecasts, which were published yesterday just as the EU’s finance ministers assemble for a two-day ECOFIN meeting.

The spring forecast issued by the EC yesterday seemed positive with respect to Malta’s public finances. Malta’s two-page section of the 164-page report was, in fact, entitled: Malta: Public finances on a sounder footing.

The spring forecasts, which, of course are not related to the EC’s euro convergence assessment, predict Malta’s GDP to continue to grow at a “healthy pace” of three per cent over 2007, and to slow marginally to 2.8 per cent in 2008.

Employment growth, which stood at 0.9 per cent in 2006, in line with historical trends, is expected to remain constant in 2007 and 2008. Beyond the next two years, further employment is expected to be generated mainly from the services sector – primarily in information technology, financial services, remote gaming and call

centres.

As such, the EC forecasts Malta’s overall unemployment rate to fall to 7.3 per cent by 2008.

HICP inflation, Malta’s main stumbling block on the race to euro adoption, stood at 2.6 per cent in 2006, and is expected to fall to below 1.5 per cent in 2007. In 2008, the inflation rate would rise again to above two per cent on the basis of assumed energy price developments as well as an assumption that the “exceptionally low” underlying inflation recorded in recent months would return to historical trends.

On public finances, the EC remarks on the fact that Malta’s budgetary consolidation, which began in 2004, had continued in 2006 when the general government deficit fell to 2.6 per cent of GDP.

In 2007, the EC forecasts the deficit to decline further to 2.1 per cent of GDP, which can be explained, according to the EC, by a deceleration in current expenditure due mainly to a significantly lower rise in public sector wages than the rise in GDP, reflecting the government’s “drive to contain spending”.

The following year, 2008, is expected to witness a further decline in the deficit to 1.6 per cent of GDP – under a no-policy-change scenario and excluding any one-off operations, the report said.

General government debt, which had stood at some 66.5 per cent of GDP, is anticipated to decline to slightly below 66 per cent of GDP in 2007 and to 64.3 per cent in 2008.

Economic activity is forecast to be mainly domestically-driven in both 2007 and 2008. Private consumption is anti-cipated to grow at a slightly faster pace, at 2.8 per cent in 2007, on account of an improvement in disposable income brought about by lower personal income taxes, continued high employment and lower energy prices.

The EC notes that the dissipation of the effect of the tax cut, as well as the assumed higher oil prices for 2008, are expected to lead to a small deceleration in the rate of increase of private consumption in 2008. Public consumption is projected to increase at low rates in 2007 and 2008, reflecting the continuation of fiscal consolidation, the report said.

Gross fixed capital formation, meanwhile, is foreseen to expand significantly in 2007, by around six per cent, reflecting higher capital spending linked to the completion of the Mater Dei hospital. In 2008, however, investment is anticipated to decelerate to 0.3 per cent, due to a fall in public investment.

Overall, final domestic demand is expected to contribute by slightly more than three percentage points to GDP growth in 2007 and two percentage points in 2008.