Rapid and comprehensive structural reforms are needed if Malta wants to fully benefit from the single currency, the governor of the Central Bank of Malta said yesterday.

In a critical analysis of a number of areas of government policy and the current economic situation, Michael C. Bonello made it very clear that, on its own, the adoption of the euro would not lead to faster growth and it was not the solution to all of Malta’s problems.

Although he acknowledged that Malta has made a lot of progress to meet the requirements for eurozone membership by spring of this year, namely a reduction in the budgetary deficit, a decline in public debt levels and lower inflation, “there are still structural impediments in our economy” that could prevent Malta from fully benefiting from the single currency.

Mr Bonello, who was addressing a business breakfast yesterday morning, said that a country can only benefit from the euro if it has a flexible economy that can adapt to exterior shocks, the ability to take advantage of growth opportunities and the tools to address country-specific developments.

He said that Malta has had one of the lowest growth rates in the EU over the past few years and although other countries had shown less prolonged recessions, and earlier and sustained recovery, “we have lost ground since the beginning of the century.”

The governor said the underlying weaknesses are the result of government policy in the 1990s when growth was fuelled by government expenditure. This, he said, had produced internal and external imbalances that the country has inherited today. The high growth rates of the 1990s had created a false sense of security, “and we are paying the price now,” Mr Bonello said.

However, the range of tools to address the situation is limited, he said, especially in the Maltese context.

The government cannot play around with the exchange rate, interest rate decisions are now centralised, and the contribution of fiscal policy is limited even further by the starting level of the deficit and public debt, he explained.

The governor insisted that structural reforms had to be boosted because “we still lack flexibility.”

Making comparisons with other eurozone countries and with Slovenia, specifically, he said the Maltese economy still relied heavily on subsidies, spending on research and development was still low, the female employment rate was lower than the EU average, the percentage of early school leavers was way above the EU average and the number of people aged between 22 and 24 who had completed secondary school education was still low.

“The below average performance in education is not from a lack of spending. The conclusion to be made is that this must be related to inefficiencies in our education system. We spend too much on subsidies than on improving teaching and learning,” the governor said in his criticism of the government’s education policy.

Turning to unit labour costs, a measure of a country’s competitiveness, Mr Bonello said the country did not do enough during the recession in 2000 to lower labour costs when other countries did so to good effect.

Although unit labour costs were reduced slightly, productivity growth had been volatile with the result that unit labour costs remained relatively high and Malta lost its competitive edge.

“Malta’s competitiveness has fallen behind because of a lack of productivity. We are not getting enough out of what we are spending. Even when employment growth is factored in, it does not have an effect. People are not producing enough per person,” the governor said.

Looking to the road ahead, Mr Bonello said the country had to deliver more value for money, something which was not happening. The country needed an expenditure-driven fiscal consolidation with incentives for self-help.

“Government must trim expenditure to be able to reallocate resources to areas that need them. Savings must be made elsewhere to continue reducing the deficit.”

He insisted that the social partners had an important role to play as well, and criticised the fact that the figures and state of the economy were not always the starting point of a discussion.

“We need a serious debate,” Mr Bonello said.

The governor called for better use of resources to generate more output, adding that the public sector – which employed one-third of the workforce – could help to boost productivity.

The governor said the aim should be to achieve an environment that is business friendly, with education and training being relevant to industry, better regulation, simpler administrative procedures, longer availability (hours) of key public services, port reform and lower taxes.

“Fiscal reform must be expenditure-driven. With regard to pension reform, the first pillar is not enough. Means testing should be applied more widely and more work should be subcontracted to the private sector and ensure that it is done well the first time,” the governor said.

Concluding, Mr Bonello said: “More structural reform is indispensable. The responsibility to deliver is national: it must be shared by the public sector, business and the social partners.”