Herman Van Rompuy presented his interim report on economic governance to EU heads of state at a summit held in Brussels on Thursday in an effort to prevent another financial crisis from flaring up.

In truth, one can never prevent a financial crisis by economic governance. Capitalism is what it is, a cut throat system where market forces are the driver of all economic activity. But on the other hand, with good management, one can prevent a ‘self destruct’ crisis as we saw in late 2008 – the ghost of which is still with us today.

The 2008 crisis was brought about by greed, lax fiscal policy, blatant disregard for EU rules, cooking of books and gross irresponsibility by EU member states in management of their economy.

Without getting too technical, the 1995 Maastricht Growth and Stability Pact stipulates that for sustainable growth, an EU member state’s deficit must not exceed three per cent of its Gross Domestic Product. This benchmark, which in simple terms means that governments can spend only three per cent over what comes back into its coffers, has stood the test of time.

The original agreement was signed in 1993, the agreement was updated in 1995 and 15 years later the theory still holds true. In the fall out of the crisis, we saw that some countries – Ireland, Portugal, Spain and Greece – were running deficits of 10 per cent and over. Were there any consequences for the national governments? The answer is a resounding No. The EU realised that excessive deficit procedures could not be put into effect as it would have brought the stability of the euro and the European Union into serious doubt.

In the end, bailouts were drafted, fiscal support was offered and solidarity was the order of the day. This is now accepted and Europe is now on the road of slow and sluggish recovery.

But we must put things into context. A couple of years back Malta was threatened with excessive deficit procedures for a slight infringement – one per cent or so. In the end, the government argued its case and no action was taken against Malta.

On Thursday, in comments to this newspaper, Prime Minister Lawrence Gonzi said that during the meetings with other heads of state, many ideas were floated on the introduction of sanctions for states which violate the terms of the pact. However, he stopped short of giving any details. The discussion is sure to be resumed in the next round of talks in October, during the next summit. The PM made it clear that Malta believes that if a state violates the terms of the pact, then sanctions should follow no matter how big or small it is. And this is the way it should be. Effective sanctions need to be put in place and there should be no dilly-dallying on their implementation. If Europe is to avoid a crisis like that of 2008, then there needs to be an effective deterrent to stop states from exceeding the benchmark.

European Central Bank President Jean Claude Trichet suggested a ‘sin-bin’ approach whereby EU members would be stripped of voting rights for a set period of time. This would indeed be an effective deterrent. But if, for argument’s sake, Italy was ‘sin-binned’ and there was a vote on immigration – Malta, for example, would be denied the support of a staunch ally on the voting table and this would be unacceptable. Financial penalties, as suggested by others, are not viable either.

So, the discussion is still open. We are sure that a decision will be reached come October time, but Malta must stand firm. We are targeting a deficit of less than three per cent by next year. If this can be achieved, then we will be on a sound footing and in a very good position on the bargaining table. Thank God for our prudent financial system.