The European Commission yesterday, as expected, gave Malta the thumbs up to join the Eurozone on 1 January 2008, noting that the economy had picked up and that it fulfilled the necessary conditions to adopt the single currency.

In a live televised news conference, the European Commissioner for Economic and Monetary Affairs, Joaquin Almunia, said that Malta “is doing things very well” and that he was happy to give Malta “a good assessment”. The EC also approved Cyprus’ bid to join the single currency.

Mr Almunia said Maltese inflation was also under control, adding that the average over the past 12 months was some 1.8 per cent. However, he did say that more needed to be done to consolidate public finances and that there were still challenges to overcome, such as the ageing population and the fact that the economy needed to be more resilient, flexible and adaptable to ensure that the advantages of the single currency were maximised.

He said that if these targets were not achieved, there could be economic repercussions for the country’s economy.

Now that the Commission has given Malta the green light, there will be various meetings with the European Parliament, the European Central Bank and other organisations prior to a final decision being endorsed during the July Ecofin council meeting.

The EC decided to recommend that the Ecofin Council abrogate the excessive deficit procedure (EDP) for Germany, Greece and Malta since in 2006, their budget deficit fell below the three per cent of GDP ceiling on the back of a significantly improved structural budget balance reflecting permanent measures, and was projected to decrease further in 2007 and 2008.

This, said the EC, was accompanied by favourable developments in the public debt ratio in 2006 and the projection for all three countries of a decreasing trend in 2007 and 2008. This achievement indicated a credible and sustainable correction of the excessive deficit situation, and showed that such an adjustment was compatible, and indeed supportive, of economic growth, said the EC.

Commenting specifically about Malta, Mr Almunia said: “Finally, Malta has come a long way since 2003 when its public deficit amounted to 10 per cent of GDP. The perspective of euro adoption acted as a strong incentive to reduce the deficit to 2.6 per cent in 2006. The challenge now is to continue on a virtuous path as concerns the consolidation of public finances, in order to benefit fully of their contribution to stability and prosperity after the adoption of the single currency.”

As a result of Malta meeting its targets, the Commission recommended that the Ecofin Council close the procedure concerning Malta, as it considered that the excessive deficit situation had been corrected in a credible and sustainable way.

The Maltese deficit was reduced to 2.6 per cent of GDP in 2006 from 3.1 per cent in 2005 and 10 per cent in 2003.

The EC said the structural adjustment – the improvement in the cyclically-adjusted balance net of one-off and other temporary measures – amounted to slightly more than one per cent of GDP in 2006. It also pointed out that although the reduction below the three per cent of GDP Treaty reference value was achieved partly thanks to substantial one-off operations, the Commission services’ spring 2007 forecast expects the deficit to fall further – to 2.1 per cent of GDP in 2007 and to 1.6 per cent of GDP by 2008.

The EC said recourse to one-offs in 2007 was anticipated to remain practically unchanged (0.6 per cent of GDP) from the previous year but to fade away in 2008. This suggested that the deficit had been brought below the three per cent of GDP reference value in a credible and sustainable manner.

After reaching a peak in 2004, the debt-to-GDP ratio started to decline to slightly below 72.5 per cent of GDP in 2005 and to 66.5 per cent in 2006, mainly on account of significant privatisation receipts.

According to the Commission’s spring 2007 forecast, the debt ratio is expected to fall further to almost 64 per cent of GDP by 2008 (on a no-policy-change basis).

The EC said that notwithstanding these achievements, Malta needed to ensure that the period of sustained economic growth it was experiencing was used to reduce further the structural deficit towards its medium-term objective of a balanced budget. Given the high debt level and the projected increase in age-related expenditure, specifically healthcare costs, achieving adequate progress towards the medium-term objective would also improve the long-term sustainability of its public finances.

The procedure was initiated in May 2004 on the basis of a deficit of 9.7 per cent of GDP and a debt of 72 per cent of GDP in 2003. In July 2004, in accordance with Article 104(7), the Council addressed recommendations to Malta with a view to correct the excessive deficit by 2006 at the latest.