Recommendation for a COUNCIL RECOMMENDATION on Malta’s 2012 national reform programme __and delivering a Council opinion on Malta’s stability programme for 2012-2015
Date: 2012-05-30
Institutions: European Commission
Subjects: Malta, banking system, budget deficit, budgetary equilibrium, dropout, energy saving, energy supply, pay policy, property market, retirement conditions

EUROPEAN COMMISSION 

Brussels, 30.5.2012  
COM(2012) 321 final 

Recommendation for a 

COUNCIL RECOMMENDATION 

on Malta’s 2012 national reform programme  

and delivering a Council opinion on Malta’s stability programme for 2012-2015 

{SWD(2012) 321 final} 

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Recommendation for a 

COUNCIL RECOMMENDATION 

on Malta’s 2012 national reform programme  

and delivering a Council opinion on Malta’s stability programme for 2012-2015 

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(2) thereof, 

Having regard to the recommendation of the European Commission2, 

Having regard to the resolutions of the European Parliament3, 

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 States4, which together form the ‘integrated guidelines’. Member States were 
invited  to  take  the  integrated  guidelines  into  account  in  their  national  economic  and 
employment policies. 

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4 

OJ L 209, 02.08.1997, p. 1 
COM(2012)321 final 
P7_TA(2012)0048 and P7_TA(2012)0047 
Council Decision 2012/238/EU of 26 April 2012 

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(3) 

(4) 

(5) 

(6) 

(7) 

(8) 

On 12 July 2011, the Council adopted a recommendation on Malta’s national reform 
programme for 2011 and delivered its opinion on Malta’s updated stability programme 
for 2011-2014. 

On 23 November 2011, the Commission adopted the second Annual Growth Survey, 
marking  the  start  of  the  second  European  semester  of  ex-ante  and  integrated  policy 
coordination,  which  is  anchored  in  the  Europe  2020  strategy.  On  14  February  2012, 
the  Commission,  on  the  basis  of  Regulation  (EU)  No  1176/2011,  adopted  the  Alert 
Mechanism Report5, in which it did not identify Malta as one of the Member States for 
which an in-depth review would be carried out. 

On 2 March 2012, 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. 

On 2 March 2012, the European Council also invited the Member States participating 
in  the  Euro  Plus  Pact  to  present  their  commitments  in  time  for  inclusion  in  their 
stability or convergence programmes and their national reform programmes. 

On 30 April 2012, Malta submitted its 2012 stability programme covering the period 
2012-2015  and,  on  23  April  2012,  its  2012  national  reform  programme.  In  order  to 
take  account  of  their  interlinkages,  the  two  programmes  have  been  assessed  at  the 
same time. 

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  is  optimistic,  especially  in  the  outer 
years  of  the  stability  programme  period  when  compared  with  potential  growth  as 
estimated by the Commission. The objective of the budgetary strategy outlined in the 
programme  is  to  gradually  reduce  the  deficit,  to  0.3%  of  GDP  in  2015,  after  the 
planned  correction  of  the  excessive  deficit  in  2011.  The  programme  confirms  the 
previous medium-term budgetary objective (MTO) of a balanced position in structural 
terms,  which  is  to  be  achieved  beyond  the  programme  period.  The  MTO  adequately 
reflects  the  requirements  of  the  Stability  and  Growth  Pact.  There  are  risks  that  the 
deficit outcomes could be worse than targeted, stemming from (i) lower revenue given 
the  slightly  optimistic  macroeconomic  scenario;  (ii)  possible  overruns  in  current 
primary  expenditure;  and  (iii)  the  ongoing  restructuring  of  the  national  airline  (Air 
Malta)  and  financial  situation  of  the  energy  provider  (Enemalta).  Based  on  the 
(recalculated) structural budget balance6, annual progress towards the MTO is planned 
to be in line with the 0.5% of GDP benchmark in the Stability and Growth Pact. Using 
the  Commission’s  identification  of  the  one-offs  included  in  the  budgetary  targets, 
average  progress  towards  the  MTO  is  slightly  higher  (¾%  of  GDP)  but  spread  very 
unevenly, with no progress in 2012 followed by an effort of 1¼% in 2013. According 

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COM(2012) 68 final 
Cyclically  adjusted  balance  net  of  one-off  and  temporary  measures,  recalculated  by  the  Commission 
services  on  the  basis  of  the  information  provided  in  the  programme,  using  the  commonly  agreed 
methodology. 

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to  the  information  provided  in  the  programme,  the  growth  rate  of  government 
expenditure, taking into account discretionary revenue measures, would be in line with 
the  expenditure  benchmark  of  the  Stability  and  Growth  Pact  throughout  the 
programme period. The risks to the budgetary targets imply, however, that the average 
adjustment towards the MTO could be slower than appropriate. After peaking at 72% 
of GDP in 2011, the general government gross debt ratio is planned in the programme 
to start decreasing and to reach 65.3% of GDP in 2015 (still above the 60% of GDP 
reference value). According to the plans in the programme, Malta is making sufficient 
progress  towards  meeting  the  debt  reduction  benchmark  of  the  Stability  and  Growth 
Pact at the end of the transition period (2015) but this assessment is subject to risks as 
the debt ratio could turn out higher than planned given the possibility of higher deficits 
and stock-flow adjustments. Malta's medium-term budgetary framework remains non-
binding,  implying  a  relatively  short  fiscal  planning  horizon.  The  programme 
announces that the Maltese government is considering reforms to the annual budgetary 
procedure,  including  timelines,  and  introducing  a  fiscal  rule  embedded  in  the 
Constitution,  including  monitoring  and  corrective  mechanisms,  in  line  with  recent 
changes to the euro area governance framework. 

(9)  Malta  remains  at  high  risk  as  regards  the  long-term  sustainability  of  its  public 
finances,  with  a  projected  long-term  increase  in  age-related  expenditure  exceeding 
considerably the EU average. A very low activity rate of older workers, including of 
older women; a relatively low exit age; and recourse to early retirement schemes add 
to  the  scope  of  the  challenge.  An  independent  Pensions  Working  Group  submitted 
proposals for further pension reform in December 2010, including a link between the 
retirement rate and life expectancy, as well as the introduction of additional pillars to 
the  pension  system.  This  has  been  subject  to  consultation  with  stakeholders  but  the 
government  has  yet  to  announce  its  position.  Moreover,  the  National  Reform 
Programme  does  not  propose  a  comprehensive  active-ageing  strategy.  While  noting 
the measures introduced by Malta to combat undeclared work, its incidence also risks 
exerting undue pressure on the sustainability of public finances. 

(10)  The  restructuring  of  Malta's  economy  has  created  a  mismatch  between  demand  and 
supply of skills, intensified by low tertiary education attainment and high early school 
leaving  rates.  Efforts  to  improve  links  between  the  education  system  and  labour 
market  needs  need  to  be  maintained  to  ensure  lasting  results.  Malta  is  expected  to 
present a strategy to tackle early school leaving by end of 2012. There is moreover no 
comprehensive system for collecting and analysing information on the phenomenon.  

(11)  Malta still exhibits a low participation rate in its labour market for women and older 
workers.  Malta  is  taking  steps  to  bring  women  back  into  the  labour  force.  However, 
the gender employment gap and the impact of parenthood are particularly negative for 
women,  primarily  due  to  the  lack  of  affordable  childcare  and  accessible  after-school 
facilities,  coupled  with  a  low  uptake  of  family-friendly  measures  like  flexitime  and 
teleworking.  

(12)  Malta  remains  one  of  the  few  Member  States  with  a  generalised  wage  indexation 
system.  While  the  mechanism  has  features  that  potentially  mitigate  its  impact,  it 
entails  a  risk  of  wage-price  spirals,  particularly  because  imported  prices  are  not 
excluded  from  the  index,  and  may  hamper  competitiveness,  especially  in  labour-
intensive sectors. The authorities have undertaken a review process, but the results are 
not yet available, and debate on concrete reform proposals has yet to begin.  

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(13)  Energy  supply  in  Malta  remains  almost  fully  dependent  on  imported  oil,  while  the 
contribution  of  renewable  energy  sources  continues  to  be  marginal.  High  electricity 
tariffs  may  hamper  the  competitiveness  of  its  small  and  medium-sized  enterprises. 
Addressing  shortcomings  in  energy  efficiency  could  bring  the  double  benefit  of 
improving  competitiveness  and  achieving  energy  and  climate  targets.  A  number  of 
initiatives in these areas have been undertaken such as encouraging the generation of 
photovoltaic power and developing wind farms, building an electricity interconnector 
with Sicily and promoting the use of fuel-efficient cars. However, it is still too early to 
see the eventual impact of these initiatives so their implementation needs to be closely 
monitored. 

(14)  The banking system in Malta is very large in proportion to the  size of the economy, 
with total assets standing at around 800% of GDP. The sheer size of the sector implies 
that  disruptions  to  financial  stability  could  have  a  disproportionate  impact  on  the 
domestic  economy.  The  global  economic  downturn  brought  about  an  increase  in 
problematic  loans,  which  however  has  not  been  accompanied  by  an  increase  in 
provisioning. In particular the large exposure to the real estate market, which accounts 
for over half of all loans to domestic residents, is a source of vulnerability especially 
as a further downward correction in property prices cannot be excluded, while housing 
units may currently be in oversupply.  

(15)  Malta  has  made  a  number  of  commitments  under  the  Euro  Plus  Pact.  The 
commitments, and the implementation of the commitments presented in 2011, relate to 
improving  competitiveness,  fostering  employment  and  fostering  the  sustainability  of 
public  finances.  The  Commission  has  assessed  the  implementation  of  the  Euro  Plus 
Pact commitments. The results of this assessment have been taken into account in the 
recommendations. 

(16) 

In  the  context  of  the  European  Semester,  the  Commission  has  carried  out  a 
comprehensive analysis of Malta’s economic policy. It has assessed the 2012 stability 
programme  and  the  2012  national  reform  programme.  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 (6) below.  

(17) 

In  the  light  of  this  assessment,  the  Council  has  examined  the  2012  Malta’s  stability 
programme, and its opinion7 is reflected in particular in recommendation (1) below, 

HEREBY RECOMMENDS that Malta should take action within the period 2012-2013 to: 

1. 

Reinforce the budgetary strategy in 2012 with additional permanent measures so as 
to  ensure  adequate  progress  towards  the  medium-term  budgetary  objective  (MTO) 
and keep the deficit below 3% of GDP without recourse to one-offs. Continue fiscal 
consolidation  at  an  appropriate  pace  thereafter,  so  as  to  make  sufficient  progress 
towards  the  MTO,  including  meeting  the  expenditure  benchmark,  and  towards 
compliance with the debt reduction benchmark, by specifying the concrete measures 
to  back  up  the  deficit  targets  from  2013,  while  standing  ready  to  take  additional 

7 

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

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measures in case of slippages. Implement, by end-2012 at the latest, a binding, rule-
based multi-annual fiscal framework. Increase tax compliance and fight tax evasion, 
and reduce incentives towards indebtedness in corporate taxation. 

Take  action,  without  further  delay,  to  ensure  the  long-term  sustainability  of  the 
pension system, comprising (i) a significant acceleration of the progressive increase 
in  the  retirement  age  compared  to  current  legislation,  (ii)  a  clear  link  between  the 
statutory retirement age and life expectancy and (iii) measures to encourage private 
pension savings. Take measures to increase the participation of older workers in the 
labour force and discourage the use of early retirement schemes. 

Take steps to reduce the high rate of early school leaving. Pursue policy efforts in the 
education  system  to  match  the  skills  required  by  the  labour  market.  Enhance  the 
provision and affordability of more childcare and out-of-school centres, with the aim 
of reducing the gender employment gap, and at the same time reducing the effects of 
parenthood on female employment. 

Take the necessary further steps to reform, in consultation with social partners and in 
accordance  with  national  practices,  the  system  of  wage  bargaining  and  wage 
indexation, so as to better reflect developments in labour productivity and reduce the 
impact of prices of imports on the index. 

In  order  to  reduce  Malta's  dependence  on  imported  oil,  step  up  efforts  to  promote 
energy efficiency and increase the share of energy produced from renewable sources 
by carefully monitoring the existing incentivising mechanisms and by prioritising the 
further  development  of  infrastructure,  including  by  completing  the  electricity  link 
with Sicily. 

To  strengthen  the  banking  sector,  take  measures  to  mitigate  potential  risks  arising 
from the large exposure to the real estate market. Take measures to futher strenghten 
the provisions for loan impairment losses.  

2. 

3. 

4. 

5. 

6. 

Done at Brussels, 

For the Council 
The President 

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