Just a few months after the European Commission lifted the Excessive Deficit Procedure with regard to Malta, the Commission yesterday recommended that the Council re-opens an EDP for Malta.

At the same time, the Commission recommended that the Council abrogate the EDP for five countries: Hungary, Italy, Latvia, Lithuania and Romania.

From 24 countries under EDP, they are now 16, Malta included.

Moreover, the Commission has adopted Recommendations to the Council with a view to extend the deadlines for correcting the excessive deficit in six countries: Spain, France, the Netherlands, Poland, Portugal and Slovenia.

In addition, the Commission has recommended that the Council decides that no effective action has been taken by Belgium to put an end to the excessive deficit and that the Council gives notice to Belgium to take measures to correct the excessive deficit.

President Barroso said: "Now is the time to step up the fundamental economic reforms that will deliver growth and jobs, which our citizens, especially our young people, anxiously expect. This is the only way to address the two lasting legacies of this crisis – the serious loss of competitiveness in many of our Member States, and persistent unemployment, with all its social consequences. The recommendations issued by the Commission today are part of our comprehensive strategy to move Europe beyond the crisis. They are concrete, realistic, and adapted to the situation of each of our Member States."

The Country-specific Recommendations are documents prepared by the European Commission for each country, analysing its economic situation and providing recommendations on measures it should adopt over the coming 18 months.

They are tailored to the particular issues the Member State is facing and cover a broad range of topics: the state of public finances, reforms of pension systems, measures to create jobs and to fight unemployment, education and innovation challenges, etc. The final adoption of Country-specific Recommendations prepared by the Commission is done at the highest level by national leaders in the European Council.

Country overview

Malta faces important entrenched challenges that affect the sustainability of its public finances and its potential growth, and it was one of the countries identified by the Commission as experiencing macroeconomic imbalances, pertaining in particular to the financial sector and public finances.

Malta made limited progress in implementing the 2012 country-specific recommendations.

On the positive side, in the area of public finances, adequate action has been taken towards strengthening tax compliance and fighting tax evasion, but concrete results are yet to materialise.

Relevant, albeit insufficient, measures were introduced in the labour market, in particular towards devising an early-school-leaving strategy, improving the links with education and training and encouraging female employment. Steps have also been taken towards improving the security and diversification of the energy supply.

Banking system reforms are in the pipeline, but concrete action has yet to be taken.

In addition, no concrete action has been taken towards strengthening the fiscal framework, reducing the debt bias in corporate taxation, further reforms of the pension system and addressing potential risks linked to the wage indexation mechanism.

Finally, measures taken in energy, climate and transport are far from sufficient in view of the scale of the challenges in these areas. The identified challenges have hence remained broadly unchanged over the past year.

The Commission has issued five country specific recommendations (CSRs) to Malta to help it improve its economic performance. These are in the areas of:

Sustainable public finances and tax compliance

The slippages in its fiscal deficit observed at the end of 2012 (3.3%) puts Malta further away from bringing its public finances back onto a sustainable path. Malta should correct this trajectory in a growth-friendly manner. Malta has adopted some measures to improve tax compliance but they must be properly implemented to achieve results. Malta has moreover taken no relevant action to reduce indebtedness in corporate taxation.

Sustainable pension and healthcare systems

Malta’s public finances are expected to be unsustainable in the medium to long-term due to a projected increase in age-related expenditure. Spending on pensions, as well as healthcare, is expected to add further stress to the public coffers.

To counter this Malta should accelerate its ongoing pension reform, link retirement age with life expectancy, promote private pension savings, develop a comprehensive ageing strategy and increase cost-effectiveness in the healthcare sector.

Education, skills and family-friendly measures

Malta needs to make the best possible use of its greatest asset – human capital. The country however has one of the lowest employment rates in the EU (63.2%). Malta still has a very high number of early school leavers (22.6%), while the number of students attaining tertiary education is relatively low (22.4%). The number of women actively at work also remains very low (46.9%).

Malta should therefore continue to take measures to address skills gaps and facilitate the integration of women in the labour market through providing affordable child-minding facilities.

Energy supply, efficiency and renewables

Malta’s energy sector poses a significant challenge to its competitiveness: it mainly depends on one source of energy (imported oil), it suffers from an inefficient transmission system, and the contribution of renewables is the lowest in the EU (0.1%).

While Malta has announced further plans to address these issues, there remains room for improving efficiency and reducing emissions through the promotion of renewable energies, including transport.

Financial sector and efficiency of the judiciary

The exposure to the real estate market of Malta’s core domestic banks needs to be closely monitored and relevant measures should be put in place.

While other banks operating from Malta have limited links with its domestic economy, they account for 790% of its GDP and therefore these should be strictly supervised to prevent the accumulation of imbalances.

Certain shortcomings in Malta’s judicial system need to be addressed, notably the length in resolving non-criminal cases, as these could affect the banking sector in times of economic difficulties.