Back in March 2010, and only a few months after the break of the still ongoing European sovereign debt crisis (often referred to as the euro area crisis), the European Commission proposed a 10-year strategy specifically aimed at the advancement of the economy of the European Union (EU). Such was the negative effect of the above mentioned crisis that some countries in the euro area are still finding it very difficult or next to impossible to repay or re-finance their accumulated debts without the assistance of third parties. Aimed at ‘smart, inclusive and sustainable growth’, the Europe 2020 Strategy was proposed with the intent of creating greater coordination of both national and European policy, whilst creating a solid foothold from which such a slip can be avoided. 

The need for stronger and sounder economic governance and better policy coordination between the EU Member States gave rise to the creation of what is known as the European Semester. Within a Union of highly integrated economies, the need for enhanced policy coordination which would help prevent discrepancies and contribute further towards uniting and stabilising all the EU Member States, was felt. 

As the crisis grew, Member States saw the need for further synchronisation of their economic policies for such procedures. The agreed timelines within the European Semester would serve as a streamlining process aimed at better aligning Member State’s goals of national budgetary growth and employment policies, whilst working within a larger framework at EU level.  Furthermore, areas of surveillance and coordination had to be extended. 

The European Semester contains a clear timetable, according to which Member States receive EU-level advice and guidance by the European Commission and eventually submit their policy plans - National Reform Programmes (NRPs) and Stability (euro area) or Convergence (non euro area) programmes - which will then be assessed at EU level.

Following evaluation, the Member States are given individual recommendations ‘Country-Specific Recommendations’ (CSRs) for their national budgetary and reform policies. If necessary, they also receive recommendations to correct macroeconomic imbalances. The final objective is that Member States take into account recommendations when defining their next year's budget.

Malta’s current situation

Malta is currently facing important challenges that may affect the sustainability of its public finances and further potential for growth.  The European Commission has also identified Malta as one of the countries which is experiencing macroeconomic imbalances.

The European Commission established that Malta has made little progress in implementing and putting into practice the 2012 CSRs.  On a more positive side, adequate and timely action has been taken towards strengthening of tax compliance and fighting tax evasion, though tangible results are still 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.  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.

Resultantly, the Commission has issued five CSRs aimed at helping Malta improve its economic performance:

-         Sustainable public finances and tax compliance:  The slippages in its fiscal deficit observed at the end of 2012 (3.3% of GDP) puts Malta further away from bringing its public finances back onto a sustainable path in a growth-friendly manner.

-         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.

-         Education, skills and family-friendly measures: Malta needs to make the best possible use of its greatest asset – human capital – to address the high rate of early school leavers, the low number of students attaining tertiary education, and to increase the participation of women in the labour market.

-         Energy supply, efficiency and renewables:  Malta’s energy sector 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%);

-         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.

Maltese Prime Minister, Dr Joseph Muscat, addressing MEUSAC’s Core Group on May 31 spoke about June’s European Council discussions which will mainly focus on the European Semester, in particular the CSRs. Apart from highlighting the Government’s commitment in the energy and financial sectors and in reducing the carbon footprint, Dr Muscat also delved into matters specifically related to pensions and health, and whilst agreeing that such matters need to be addressed, he insisted that solutions based on better coordination of such areas do exist. “Government is fully committed to bring its budget deficit below the EU’s ceiling by the end of this year”, said the Prime Minister.

Neil Portelli is an executive – EU Policy and Legislatio within Meusac