Recommendation for a COUNCIL RECOMMENDATION on the National Reform Programme 2011 of Maltaand delivering a Council opinionon the updated Stability Programme of Malta 2011-2014
Date: 2011-06-07
Institutions: European Commission
Subjects: Malta, access to education, budget deficit, economic policy, employment policy, pay, pension scheme, social rights

EUROPEAN COMMISSION 

Brussels, 7.6.2011 
SEC(2011) 812 final 

Recommendation for a 

COUNCIL RECOMMENDATION 

on the National Reform Programme 2011 of Malta 

and delivering a Council opinion 

on the updated Stability Programme of Malta 2011-2014 

{SEC(2011) 726 final} 

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Recommendation for a 

COUNCIL RECOMMENDATION 

on the National Reform Programme 2011 of Malta 

and delivering a Council opinion 

on the updated Stability Programme of Malta 2011-2014 

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 
policies1, and in particular Article 5(3) thereof, 

Having regard to the recommendation of the European Commission2, 

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) 

(2) 

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

is  needed 

On 13 July 2010, 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 States3, which together form the ‘integrated guidelines’. Member States were 
invited  to  take  the  integrated  guidelines  into  account  in  their  national  economic  and 
employment policies. 

1 
2 
3 

OJ L 209, 2.8.1997, p. 1. 
OJ C , p. . 
Maintained for 2011 by Council Decision 2011/308/EU of 19 May 2011. 

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(3) 

(4) 

(5) 

(6) 

(7) 

(8) 

On  12  January  2011,  the  Commission  adopted  the  first  Annual  Growth  Survey, 
marking  the  start  of  a  new  cycle  of  economic  governance  in  the  EU  and  the  first 
European semester of ex-ante and integrated policy coordination, which is anchored in 
the Europe 2020 strategy.  

On  25  March  2011,  the  European  Council  endorsed  the  priorities  for  fiscal 
consolidation  and  structural  reform  (in  line  with  the  Council’s  conclusions  of  15 
February and 7 March 2011 and further to the Commission’s Annual Growth Survey). 
It  underscored  the  need  to  give  priority  to  restoring  sound  budgets  and  fiscal 
sustainability,  reducing  unemployment  through  labour  market  reforms  and  making 
new efforts to enhance growth. It requested Member States to translate these priorities 
into  concrete measures to be included  in their Stability or Convergence Programmes 
and National Reform Programmes. 

On 25 March 2011, the European Council also invited the Member States participating 
in the Euro Plus Pact to present their commitments on time for their inclusion in their 
Stability or Convergence Programmes and their National Reform Programmes. 

On 28 April 2011, Malta submitted its 2011 National Reform Programme and, on 29 
April  2011,  its  2011  Stability  Programme  update  covering  the  period  2011-2014.  In 
order to take account of the interlinkages, the two programmes have been assessed at 
the same time.  

As  the  economic  crisis  hit,  exports  and  investment  fell  sharply  and  real  GDP 
contracted  by  3.4%  in  2009.  Employment  contracted  only  mildly,  also  supported  by 
government  assistance.  With  exports  and  business  investment  picking  up  strongly  in 
2010,  Malta  experienced  a  marked  rebound  in  economic  activity  in  2010  and 
unemployment  inched  down.  Given  the  high  government  debt  (61.5%  of  GDP  in 
2008),  the  government  did  not  undertake  a  large  fiscal  stimulus  and  the  general 
government deficit in 2009 (3.7% of GDP) remained below that for the euro area as a 
whole.  In  2010,  the  government’s  fiscal  deficit  and  debt  ratios  remained  broadly 
stable. 

the  budgetary  projections 

Based on the  assessment  of the updated Stability Programme pursuant to Regulation 
Council  Regulation  (EC)  No  1466/97,  the  Council  is  of  the  opinion  that  the 
macroeconomic  scenario  underpinning 
is  slightly 
favourable, especially in the later years of the programme period. From 3.6% of GDP 
in 2010, the Stability Programme plans to bring the general government deficit below 
the Treaty reference value by 2011. Thereafter, gradual progress towards the medium-
term objective (MTO) of a balanced position in structural terms is to be backed up by 
a  commitment  to  ensure  a  sustainable,  largely  expenditure-based  consolidation. 
However,  the  Stability  Programme  does  not  envisage  the  achievement  of  the  MTO 
within  the  programme  horizon.  The  debt  ratio  is  projected  to  decline  from  its  2010 
peak of 68% of GDP to 63.7% in 2014, due to a positive and strengthening primary 
balance.  The  average  annual  structural  adjustment  effort  in  the  period  2012-14,  as 
calculated by the Commission, is broadly in line with the Stability and Growth Pact. 
However,  budgetary  outcomes  could  be  worse  than  targeted  because  of  possible 
expenditure  overruns  and  the  lack  of  information  on  the  measures  underpinning  the 
consolidation effort after 2011. 

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(9) 

Pursuing fiscal consolidation to achieve the MTO is a key challenge for Malta. While 
the  budget  for  2011  put  in  place  measures  to  correct  the  excessive  deficit  in  2011, 
additional  action  would  be  required  in  case  of  slippages.  The  credibility  of  the 
medium-term  consolidation  strategy,  which  is  not  yet  underpinned  by  concrete 
measures, would be enhanced by a stronger multi-annual budgetary framework. A key 
weakness  is  the  non-binding  nature  of  the  multi-annual  targets,  which  implies  a 
relatively  short  fiscal  planning  horizon.  The  Stability  Programme  states  that  the 
introduction of an expenditure rule is being considered. 

(10)  The long-term budgetary impact of ageing, including pensions, is significantly higher 
in  Malta  than  the  EU  average.  Moreover,  the  labour  market  participation  of  older 
workers is very low, due to a still relatively low retirement age, frequent recourse to 
early  retirement  schemes  and  the  very  low  participation  of  older  women.  The  2006 
pension  reform increases  the  retirement age, albeit very gradually, and addresses the 
adequacy  of  future  pensions,  in  particular  through  more  generous  indexation 
arrangements  and  the  introduction  of  a  guaranteed  national  minimum  pension.  The 
National Reform Programme reports on the ongoing consultation on the proposals for 
further  pension  reform  put  forward  by  the  Pensions  Working  Group,  including  the 
establishment  of  an  explicit  link  between  retirement  age  and  life  expectancy  and  the 
introduction  of  a  mandatory  second  pension  pillar  and  a  voluntary  third  pillar. 
However,  the  National  Reform  Programme  does  not  put  forward  a  comprehensive 
active  ageing  strategy  to  accompany  the  ongoing  and  envisaged  legislative  changes. 
The relatively high incidence of undeclared work poses a risk to the sustainability of 
public  finances  in  the  long  run.  The  government  presents  some  measures  to  address 
this problem in the National Reform Programme, but there are no proposals to revise 
the  tax-benefit  system  with  a  view  to  making  work  pay.  Fostering  participation  of 
women in the labour market is another major challenge for Malta, given that its female 
employment  rate  is  the  lowest  in  the  EU.  In  the  National  Reform  Programme  the 
government  has  put  forward  a  substantial  number  of  initiatives  targeting  female 
workers. Their implementation and impact should be evaluated in 2012. 

(11) 

In  recent  years,  Malta  has  experienced  intensive  industrial  restructuring  with 
traditional,  labour-intensive  manufacturing  being  replaced  by  new  high  added-value 
activities. This has led to a mismatch between the demand and supply of skills on the 
labour market, pointing to the need to provide the skills required by the new sectors, 
particularly  through  higher  education,  in  a  bid  to  diversify  Malta’s  economic  base 
further.  

(12)  Malta has the highest rate of early school-leavers in the EU, standing at 36.8% in 2009 
compared to an EU average of 14.4%. The country also records a low share of people 
aged 30-34 with a tertiary level of education or equivalent (21.1% compared to an EU 
average of 32.3% in 2009). Malta aims to reduce early school-leaving to 29% and to 
increase  the  share  of  tertiary  or  equivalent  education  for  30-34  year-olds  to  33%  by 
2020.  In  2011,  it  introduced  measures  to  channel  potential  early  school-leavers  to 
interesting  career  paths  through  vocational  educational  training  or  second-chance 
learning opportunities.  

(13)  Malta  is  one  of  the  few  EU  Member  States  with  a  generalised  wage  indexation 
mechanism.  Wage  increases  are  linked  to  a  mandatory  cost-of-living  adjustment 
(COLA)  mechanism,  resulting  in  wage  increases  in  line  with  past  inflation 
developments  though  proportionately  higher  at  the  low  end  of  the  wage  spectrum. 

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to 

the  minimum  wage, 

Adding 
the 
competitiveness  of  the  labour-intensive  sectors.  The  issue  is  particularly  pertinent  in 
view of the recent increases in energy prices, which could lead to wage-price spirals. 

this  adjustment  may  further  hamper 

(14)  Malta  is  almost  entirely  dependent  on  imported  oil  for  energy,  making  the  economy 
vulnerable to oil price changes. This, together with the inadequacy of Malta’s energy 
system,  may  be  posing  problems  to  entrepreneurship  and  the  competitiveness  of 
SMEs. Exploiting the potential to produce energy from renewable sources could bring 
the  double  benefit  of  improving  competitiveness  and  achieving  energy  and  climate 
targets.  The  information  provided  in  the  National  Reform  Programme  on  energy 
measures  is  limited,  however,  making  it  difficult  to  assess  their  feasibility  and  cost-
effectiveness. 

transparency  of 

the  budgetary  framework, 

(15)  Malta  has  made  a  number  of  commitments  under  the  Euro  Plus  Pact4.  The 
commitments relate to two areas of the Pact: competitiveness and the sustainability of 
public  finances.  On  the  fiscal  side,  the  commitments  involve  strengthening  the 
accountability  and 
together  with 
consideration  given  to  introducing  mechanisms  to  increase  discipline  in  budgetary 
execution.  To  address  productivity,  there  are  measures  to  improve  the  business 
environment  and financing  conditions for firms, as well as enhancing competition in 
services, especially in telecommunications. Although present in the National Reform 
Programme,  the  Euro  Plus  Pact  commitments  do  not  address  employment  and 
financial  stability.  While  the  authorities  focus  on  raising  productivity,  they  do  not 
indexation  mechanism  affects  Malta’s 
acknowledge 
competitiveness. The Euro Plus Pact commitments have been assessed and taken into 
account in the recommendations. 

the  current  wage 

that 

(16)  The  Commission  has  assessed  the  Stability  Programme  and  National  Reform 
Programme, and the Euro Plus Pact commitments for Malta5. It has taken into account 
not only their relevance for sustainable fiscal and socio-economic policy in Malta but 
also  their  conformity  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.  In  this  light,  the  Commission  considers  that,  while  the 
targeted progress towards the medium-term objective (MTO) is appropriate, there are 
important risks to the consolidation strategy, because it is not backed up with concrete 
measures and expenditure could overrun as has happened in the past. In addition, the 
non-binding  nature  of  the  medium-term  budgetary  framework  may  not  foster  fiscal 
discipline.  The  relatively  high  long-term  cost  of  ageing,  particularly  pension 
expenditure,  puts  the  long-term  sustainability  of  Malta’s  public  finances  at  risk.  The 
National  Reform  Programme  acknowledges  the  main  structural  challenges  that 
Malta’s  economy  is  facing,  though  additional  attention  to  certain  issues,  particularly 
better  utilisation  of  the  economy’s  labour  potential,  reforming  the  wage-setting 
mechanism  to  ensure  better  alignment  of  wage  and  productivity  developments,  and 
energy diversification, appear warranted.  

(17) 

In the light of this assessment, also taking into account the Council Recommendation 
of  16  February  2010  under  Article  126(7)  of  the  Treaty  on  the  Functioning  of  the 

4 
5 

More details on the commitments made under the Euro Plus Pact can be found in SEC(2011) 726. 
SEC(2011) 726. 

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European  Union,  the  Council  has  examined  the  2011  update  of  the  Stability 
Programme of Malta and its opinion6 is reflected in particular in its recommendation 
under (1) and (2) below. Taking into account the European Council conclusions of 25 
March 2011, the Council has examined the National Reform Programme of Malta.  

HEREBY RECOMMENDS that Malta should take action within the period 2011-2012 to:  

(1) 

(2) 

(3) 

(4) 

(5) 

Ensure correction of the excessive deficit in 2011, standing ready to take additional 
measures so as to prevent possible slippages, and adopt concrete measures to back up 
the 2012 deficit target. With a view to strengthening the credibility of the medium-
term  consolidation  strategy,  define  the  required  broad  measures,  embed  the  fiscal 
targets  in  a  binding,  rule-based  multi-annual  fiscal  framework  and  improve  the 
monitoring of budgetary execution. 

Take  action  to  ensure  the  sustainability  of  the  pension  system  by  accelerating  the 
progressive  increase  in  the  retirement  age  and  by  linking  it  to  life  expectancy. 
Accompany the higher statutory retirement age with a comprehensive active ageing 
strategy,  discourage  the  use  of  early  retirement  schemes  and  encourage  private 
pension savings.  

Focus education outcomes more on labour market needs, notably by taking measures 
to improve access to higher education and by strengthening the effectiveness of the 
vocational  training  system.  Take  measures  to  reduce  early  school-leaving  by 
identifying, analysing and measuring its causes by 2012 and by setting up a regular 
monitoring and reporting mechanism on the success rate of the measures. 

Reform  the  automatic  wage  indexation  mechanism,  in  consultation  with  the  social 
partners  in  accordance  with  national  practice,  to  ensure  that  wage  growth  better 
reflects developments in labour productivity and competitiveness.  

Strengthen  efforts  to  reduce  Malta’s  dependence  on  imported  oil,  by  bringing 
forward  investments  in  renewable  energies  and  making  full  use  of  available  EU 
funds to upgrade infrastructure and promote energy efficiency.  

Done at Brussels, 

For the Council 
The President 

6 

Foreseen in Article 5(3) of Council Regulation (EC) No 1466/97. 

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