The ongoing de-leveraging process in the banking as well as the private sector, along with the fiscal tightening, are constraining Europe’s economic recovery, said European Central Bank Governing Council member and Central Bank of Malta governor Michael Bonello on Friday.

According to RTT News, Mr Bonello noted that these two factors weighed on the European Commission’s forecast for a modest recovery in the eurozone and the EU.

“The recovery in Europe is constrained by the de-leveraging process currently underway in the banking sector and in the private sector generally,” he said. According to the spring forecast from the European Commission, the eurozone gross domestic product would rise 0.9 per cent this year and the EU economy would grow by one per cent.

A key lesson from the current crisis “is a universal law that often tends to be forgotten: like individuals, countries cannot afford to live beyond their means indefinitely”, said Bonello. “Sooner or later, the excesses of the past have to be paid for, often at a high economic and social cost.”

He noted that the recent proposals by the European Commission to strengthen economic policy coordination and fiscal discipline are grounded precisely on this fact.

Furthermore, he said that the clouded outlook for demand on the part of Malta’s trading partners, and the likely spill over from the deflationary fiscal policies being adopted in many countries, may risk the economy’s growth outlook.

According to Central Bank of Malta forecasts, the domestic economy is expected grow 1.1 per cent this year and 1.8 per cent in 2011. The European Commission’s spring forecast suggests 1.2 per cent growth for the country in 2010 and 1.8 per cent expansion next year.

Mr Bonello noted that Malta’s economic contraction in 2009 was much slower, compared to the whole currency bloc, thanks to the resilient services activities. Malta’s GDP fell by 1.9 per cent in 2009, compared with 4.1 per cent in the eurozone. A sharp decline in investment acted as a major drag on demand in 2009, but private consumption held up.