By Norman Aquilina
The English poet John Dunne once famously said ‘No man is an Island’. This phrase does not only describe a great deal about the human predicament, but it can also be interpreted to shed light on widely agreed upon economic theory. Countries do not thrive when isolated from others. In Malta we are more prone to feel the sting of this reality than others, as our state suffers from issues of geographical insularity and a limitation in resources.
During a conference organised by the Malta Chamber of Commerce, Enterprise and Industry in collaboration with the European Economic and Social Committee (Employers Group), we asked whether Europe’s Industrial Policy operates a one-size-fits-all approach. All present seemed to agree that unfortunately this tends to be the case, and that this approach is rendering it very difficult for small peripheral states like Malta, to reach the targetof manufacturing being responsible for 20%of GDP. This, of course, is detrimental to the European dimension of industry because, production in Europe now increasingly involves value chains stretching across countries, with each country specialising in one or several stages. The EU’s capacity to innovate together will, in future, guarantee a robust position in the face of global competition.
In terms of this complementarity aspect, I feel that Europe needs to ensure that peripheral regions and States are given a fair opportunity to compete from the same starting line and be therefore allowed to make their fair contribution to European industry.
It is therefore felt that more concrete and equitable support is needed in terms of compensating measures to neutralize the natural disadvantages that operators in both these peripheral regions and States are obliged to face in terms of added costs.
The situation of peripheral regions and states is not aided by the inconsistent treatment that is evident within the definitions underlying the Regional Aid framework. The main problem here lies in the fact that, in the current framework, permission to grant compensatory measures to geographical restrictions relies on volatile conditions such as statistical GDP averages. This, in itself, creates a degree of uncertainty which is of course not conducive towards encouraging investment. Investors do not like being at the mercy of external factors which are entirely out of their control such as the macro-economic performance of their country as a percentage of the average performance of all 28 EU member states.
Moreover, a review of the situation shows that certain islands are classified as an ‘a’ area status, previously known as ‘Objective 1’, because they are ‘outermost’ regions of another EU member state. A case in point is Madeira, which is the second richest region in Portugal, with a GDP per capita of 104% of the EU average. Clearly, Malta faces equivalent challenges as a small, remote island-state, but is classified as a ‘c’ area - hence the limitations on regional aid.
Further inconsistency is noticed in the ‘a’ area status of regions on the European mainland (like Basilicata in Italy) which do not suffer from permanent geographical handicaps that increase operating costs. Nevertheless, State Aid in such regions is still permissible on the basis of the GDP per capita (in PPS criteria).
The Malta Chamber strongly believes that this ‘advantage’ to regions on the mainland is considered unfair to Malta’s competitiveness position and will continue to intensify our decline in such a price-sensitive sector as manufacturing.
I feel that a solution to this predicament centres around a universal adoption of the definition for ‘Remote Regions’ across all European legislation, that is, for both regions and island states. Indeed, there are examples and precedents in recent European legislation that recognize the fact that operating in Remote Regions poses certain unique challenges that justify the granting of state aid in order to preserve fair competition across the Single Market. One such example is the so-called Aviation Guidelines adopted by the European Commission to regulate state aid to airports and airlines. In these Guidelines, the definition of 'Remote regions' include all outermost regions adding Malta and Cyprus which are Island States.
Besides, similar arguments were already accepted by the EU when, in December 2012, it justified an additional top up of funds during the negotiations on the last round of Malta’s allocation from the EU Budget in line with the Lisbon Treaty and in recognition of the permanent handicaps of island member states.
In our view, it is crucial that Malta insists that these principles are applied across the board insofar as Regional Aid is concerned. This will serve to avoid the inconsistency, confusion and discrimination between companies operating in different sectors and industries in Remote Regions. To put it differently, we feel that what applies to our colleagues in the aviation business should apply equally to us in the manufacturing industry.
As isclearly outlined in the Malta Chamber’s Industrial Policy document, we must think ahead in terms of skills availability, innovation and internationalisation. But in the more immediate term, we must address our cost structures and ensure they are aligned with the country’s competitive needs.
Our mission today, is therefore to renew our appeal to the European Commission to understand and reflect this genuine predicament in its review of State Aid Regulations which is to take place in 2018. We strongly believe that the Commission should immediately address its unfair opposition and treat all Islands equally – irrespective of whether they are regions or States. Europe must allow permanent compensatory measures to our permanent geographical limitations that impinge strongly on our cost base.
Europe risks failure in overcoming regional challenges in manufacturing unless it alters the one-size-fits-all approach in its Industrial Policy and Regulations. In doing so, it risks imposing further isolation on Islands and regions with similar characteristics as Malta.
Norman Aquilina is Chairman of the Manufacturing Economic Group within the Malta Chamber