# EUR-Lex - 52013DC0368 - EN

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# 52013DC0368

**Recommendation for a COUNCIL RECOMMENDATION on Malta’s 2013 national reform programme and delivering a Council opinion on Malta’s stability programme for 2012-2016 /* COM/2013/0368 final */**

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Recommendation for a

COUNCIL RECOMMENDATION

on Malta’s 2013 national reform programme
and delivering a Council opinion on Malta’s stability programme for 2012-2016

Recommendation for a

COUNCIL RECOMMENDATION

on Malta’s 2013 national reform programme
and delivering a Council opinion on Malta’s stability programme for 2012-2016

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the
Functioning of the European Union, and in particular Articles 121(2) and 148(4)
thereof,

Having regard to Council Regulation (EC) No
1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary
positions and the surveillance and coordination of economic policies[1], and in particular Article 5(2)
thereof,

Having regard to Regulation (EU) No 1176/2011
of the European Parliament and of the Council of 16 November 2011 on the
prevention and correction of macroeconomic imbalances[2], and in particular Article 6(1)
thereof,

Having regard to the recommendation of the
European Commission[3],

Having regard to the resolutions of the
European Parliament[4],

Having regard to the conclusions of the
European Council,

Having regard to the opinion of the
Employment Committee,

After consulting the Economic and Financial
Committee,

Whereas:

(1)       On 26 March 2010, the European
Council agreed to the Commission’s proposal to launch a new strategy for growth
and jobs, Europe 2020, based on enhanced coordination of economic policies,
which will focus on the key areas where action is needed to boost Europe’s potential for sustainable growth and competitiveness.

(2)       On 13 July 2010, on the
basis of the Commission's proposals, the Council adopted a recommendation on
the broad guidelines for the economic policies of the Member States and the
Union (2010 to 2014) and, on 21 October 2010, adopted a decision on guidelines
for the employment policies of the Member States[5],
which together form the ‘integrated guidelines’. Member States were invited to
take the integrated guidelines into account in their national economic and
employment policies.

(3)       On 29 June 2012, the Heads
of State or Government decided on a Compact for Growth and Jobs, providing a
coherent framework for action at national, EU and euro area levels using all
possible levers, instruments and policies. They decided on action to be taken
at the level of the Member States, in particular expressing full commitment to
achieving the objectives of the Europe 2020 Strategy and to implementing the
country-specific recommendations.

(4)       On 6 July 2012, the
Council adopted a recommendation on Malta’s national reform programme for 2012
and delivered its opinion on Malta’s updated stability programme for 2011-2015.

(5)       On 28 November 2012, the
Commission adopted the Annual Growth Survey[6],
marking the start of the 2013 European Semester of economic policy
coordination. Also on 28 November 2012, the Commission, on the basis of
Regulation (EU) No 1176/2011, adopted the Alert Mechanism Report[7], in which it identified Malta as one of the Member States for which an in-depth review would be carried out.

(6)       On 14 March 2013, the
European Council endorsed the priorities for ensuring financial stability,
fiscal consolidation and action to foster growth. It underscored the need to
pursue differentiated, growth-friendly fiscal consolidation, to restore normal
lending conditions to the economy, to promote growth and competitiveness, to
tackle unemployment and the social consequences of the crisis, and to modernise
public administration.

(7)       On 10 April 2013, the
Commission published the results of its in-depth review[8] for Malta, under Article 5 of
Regulation (EU) No 1176/2011. The Commission’s analysis leads it to conclude
that Malta is experiencing macroeconomic imbalances, which deserve monitoring
and policy action. In particular, the banking sector and real estate market
developments warrant close monitoring. The long-term sustainability of public
finances requires policy attention.

(8)       On 30April 2013, Malta
submitted its 2013 stability programme covering the period 2012-2016 and its
2013 national reform programme. In order to take account of their
interlinkages, the two programmes have been assessed at the same time.

(9)       Based on the assessment of
the 2012 Stability Programme pursuant to Council Regulation (EC) No 1466/97,
the Council is of the opinion that the macroeconomic scenario underpinning the
budgetary projections in the programme is plausible. The Council abrogated its
decision on the existence of an excessive deficit in Malta on 4 December
2012, on account of its correction in 2011, which based on the Commission’s
2012 autumn forecast appeared durable. However, in 2012 Malta recorded a general government deficit of 3.3% of GDP, again above the reference value
of 3% of GDP. The objective of the budgetary strategy outlined in the programme
is to gradually reduce the deficit from 3.3% of GDP in 2012 to 0.8% of GDP in
2016, implying gradual progress towards the medium-term objective. The
programme confirms the medium-term objective of a balanced position in
structural terms, which is more ambitious than required by the Stability and
Growth Pact, but its achievement is not planned within the programme period.
The 2013 deficit target in the programme relies on relatively high growth in
tax revenues, which does not appear to be fully explained by the underlying
macroeconomic scenario. In addition, it is not sufficiently supported by
detailed measures, as is also the case for the subsequent years. As a result,
the change in the planned (recalculated) structural balance is significantly
higher than in the Commission’s forecast. According to the latter, the
structural balance improves by just 1⁄4 pp. of GDP in 2013 and only marginally in
2014, on a no-policy-change basis. General government debt is projected to
remain above the 60% of GDP threshold over the whole programme horizon. The
national authorities project the debt to increase to 74.2% of GDP in 2014 and
subsequently to start decreasing to 70% by 2016. In the Commission’s 2013
spring forecast, the debt-to-GDP ratio is expected to increase slightly faster,
to 74.9% in 2014, as the primary deficit is expected to continue expanding.
Given the correction of the excessive deficit in 2011, Malta is in a three-year transition period as regards the applicability of the debt
reduction benchmark, starting in 2012. Malta did not make sufficient progress
towards compliance with the debt criterion in 2012 and is not projected to do
so in 2013-14. While Malta’s fiscal framework is quite flexible, its
non-binding nature and the short horizon of fiscal planning are not supportive
of a sound fiscal position. Directive 2011/85/EU on budgetary frameworks has
not yet been transposed and a structural budget balance rule, as provided for
in the Treaty on Stability, Coordination and Governance, has not yet been
introduced into national law. The stability programme states the intention of
the government to set up a fiscal council, but no concrete plans are laid out.

(10)     Tax compliance and evasion
continue to pose a challenge to the quality of public finances. The authorities
have introduced a number of relevant measures and additional ones are in the
pipeline, but implementation needs to be monitored closely as concrete results
are yet to materialise. Tax incentives for companies to take on debt are still
very high. In 2012, Malta stood out as the country with the second highest gap
between the tax treatment of debt and equity financing of new investment.This
debt bias may lead to excessively high corporate leverage and inefficient
allocation of capital. Malta is among the few Member States without any
provisions to counter the debt bias.

(11)     Malta still faces
challenges regarding the sustainability of its public finances in view of the
budgetary impact of ageing which is projected to considerably exceed the EU
average the increase in pension expenditure accounts for more than half of the
total projected increase in age-related expenditure, while when compared to
other Member States the statutory retirement age remains low and the increase
legislated with the 2006 reform is slow. A further reform is necessary to
ensure sustainability while safeguarding adequacy and addressing
intergenerational equity concerns. While discussions were held with social
partners no concrete proposals for further pension reform were put forward. the
employment rate of older workers is low and a comprehensive active ageing
strategy has still to be developed. Limited primary care provision, combined
with the projected ageing of the population may lead to high healthcare costs
in the long term. The administrative capacity in the area of public procurement
is weak, leading to complicated and lengthy procedures.

(12)     Measures taken to reduce
the rate of early school leaving, including the recent launch of the
preparatory process leading to an early school leaving strategy are welcome,
also with a view to reducing the mismatch between the demand and supply of
skills. The effectiveness of the policy efforts made will depend on proper and
timely implementation which will have to be closely monitored. However, the
insufficient link of education and training to the labour market needs is a
major bottleneck. The envisaged creation of a single apprenticeship scheme
covering more qualification levels is also expected to contribute to fostering
a workforce geared to labour market needs.

(13)     Malta has also taken
significant steps to increase participation by women in the labour force,
mainly aimed at improving reconciliation of work and family life. Also
benefitting from a favourable cohort effect, the employment rate of women
continues to rise. However, there is room for improvement: the employment rate
of women still remains low, parenthood still has a significant effect on the
participation of women on the labour market, and the gender employment gap is
the highest in the EU. Promoting flexible working arrangements and providing
affordable childcare and afterschool facilities to a wider segment of the
population can contribute to further increasing the employment rate of women.

(14)     Malta’s cost-of-living
adjustment mechanism has specific characteristics which appear to mitigate its
negative effect on overall labour-market performance and wage adjustment: the
mechanism grants a flat rate increase, thus representing only partial
compensation for inflation to wages above the ‘reference’ basic wage, micro-
and macro-level derogation clauses are available, and wage bargaining is fully
decentralised. Nevertheless in the event of very adverse phases of the economic
cycle, the system still poses a potential challenge to the flexibility of real
wages, thereby hindering labour market adjustment and hampering
competitiveness. The volatility of prices of some components of the price index
used in the mechanism, in particular energy prices could put pressure on
inflation through wage-price spirals. Therefore, the collection of wage and
productivity data on sectoral level, and a close monitoring of the impact of
the wage indexation system will be essential to mitigate potential risks. The
Maltese authorities should closely monitor the impact of the mechanism on the
economy and stand ready to reform it as appropriate.

(15)     Malta’s competitiveness
remains at risk in view of the very limited diversification and poor
environmental performance of its energy supply leading to high electricity
tariffs. The dire financial state of the main energy provider (Enemalta),
adds to this insecurity, but the electricity connector with Sicily is expected
to provide relief after 2014. While a number of initiatives have been further
pursued, such as the uptake of photovoltaic power, the share of renewable
energy sources remains particularly low and the feasibility of major projects,
such as the development of wind farms, seems to be at stake. Progress was
registered in energy efficiency, notably for public buildings, supported
through Union funding. The environmental performance of Malta’s transport system is also poor. Malta would benefit from a comprehensive transport
strategy that seeks to improve public transport, the road network, the system’s
carbon performance and to further encourage the use of other types of transport
than passenger cars.

(16)     The banking sector in Malta is very large when compared to the domestic economy. While this is notably due to
non-core domestic and international banks, which have limited exposure to the
domestic economy, continued strict supervision of them is warranted to prevent negative
impact on financial stability from their activities. Domestic banks remain
highly exposed to the property market while specific loan-loss provisions are
relatively low. Policy discussions have taken place but this still has to
translate into appropriate regulatory action. The judicial system suffers from
inefficiencies that pose a further risk to financial stability. The long time
needed to resolve insolvency cases obstructs the efficient enforcement of
collateral rights. In times of economic stress, this may additionally burden
banks' balance sheets and increase losses, resulting in recapitalisation needs.

(17)     In the context of the European
Semester, the Commission has carried out a comprehensive analysis of Malta’s economic policy. It has assessed the stability programme and national reform
programme, and presented an in-depth review. It has taken into account not only
their relevance for sustainable fiscal and socio-economic policy in Malta but
also their compliance with EU rules and guidance, given the need to reinforce
the overall economic governance of the European Union by providing EU-level
input into future national decisions. Its recommendations under the European
Semester are reflected in recommendations (1) to (5) below.

(18)     In the light of this
assessment, the Council has examined Malta’s stability programme, and its
opinion[9]
is reflected in particular in recommendation (1) below.

(19)     In the light of the
Commission’s in-depth review and this assessment, the Council has examined the
national reform programme and the stability programme. Its recommendations
under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations
(2) and (5) below,

(20)     In the context of the
European Semester the Commission has also carried out an analysis of the
economic policy of the euro area as a whole. On this basis the Council has
issued specific recommendations addressed to the Member States whose currency
is the euro. Malta also should ensure the full and timely implementation of
these recommendations.

HEREBY RECOMMENDS that Malta should take action within the period 2013-2014 to:

1.           Specify and implement the
measures needed to achieve the annual structural adjustment effort set out in
the Council recommendations under the EDP in order to correct the excessive
deficit by 2014 in a sustainable and growth-friendly manner, limiting recourse
to one-off/temporary measures. After correcting the excessive deficit, pursue the
structural adjustment effort at an appropriate pace so as to reach the MTO by
2017. Put in place a binding, rule-based multiannual fiscal framework in 2013. Ensure
concrete delivery of measures taken to increase tax compliance and fight tax
evasion, and take action to reduce the debt bias in corporate taxation.

2.           To ensure the long-term
sustainability of public finances, reform the pension system to curb the
projected increase in expenditure, including by accelerating the increase in
the statutory retirement age, by introducing a link between the statutory
retirement age and life expectancy and by encouraging private pension savings.
Take measures to increase the employment rate of older workers by developing
and implementing a comprehensive active ageing strategy. Pursue health-care
reforms to increase the cost-effectiveness of the sector, in particular by
strengthening public primary care provision. Improve the efficiency and reduce
the length of public procurement procedures.

3.           Continue to pursue policy
efforts to reduce early school leaving, notably by setting up a comprehensive
monitoring system, and increase the labour-market relevance of education and
training to address skills gaps, including through the announced reform of the apprenticeship
system. Continue supporting the improving labour-market participation of women by
promoting flexible working arrangements, in particular by enhancing the
provision and affordability of child-care and out-of-school centres.

4.           Continue efforts to
diversify the energy mix and energy sources, in particular through increasing
the take up of renewable energy and the timely completion of the electricity
link with Sicily. Maintain efforts to promote energy efficiency and reduce emissions
from the transport sector.

5.           Take measures to further
strengthen the provisions for loan-impairment losses in the banking sector to
mitigate potential risks arising from exposure to the real estate market.
Maintain policy effort to ensure strict banking sector supervision, including
for the non-core domestic and internationally-oriented banks. Improve the overall
efficiency of the judicial system, for example by reducing the time needed to
resolve insolvency cases.

Done at Brussels,

For
the Council

The
President

[1]               OJ L 209, 2.8.1997, p. 1.

[2]               OJ L 306, 23.11.2011, p. 25.

[3]               COM(2013) 368 final .

[4]               P7_TA(2013)0052 and P7_TA(2013)0053.

[5]               Council Decision 2013/208/EU of 22 April 2013.

[6]               COM(2012) 750 final.

[7]               COM(2012) 751 final.

[8]               SWD(2013) 120 final.

[9]               Under Article 5(2) of Council Regulation (EC) No
1466/97.